Testimony

of the

American Hospital Association

before the

Subcommittee on Antitrust, Competition Policy and Consumer Rights

of the

Committee on the Judiciary

of the

U.S. Senate

“Examining Consolidation in the Health Insurance Industry and its Impact on Consumers”

September 22, 2015

I am Rick Pollack, president and CEO of the American Hospital Association (AHA). On behalf

of our nearly 5,000 member hospitals, health systems and other health care organizations, and

our 43,000 individual members, I thank you for the opportunity to testify.

Both of the recently proposed commercial health insurance deals – Anthem’s acquisition of

Cigna and Aetna’s acquisition of Humana – could be a blow to millions of health care

consumers, as well as the hospitals, doctors and others who are working to improve quality and

efficiency while making care more affordable to patients. The unprecedented level of

consolidation these deals threaten could make health insurance more expensive and less

accessible for consumers. This applies to health insurance purchased in the commercial market

as well as Medicare Advantage (MA) plans. These deals also could further entrench the power of

the Blues plans, which currently dominate the market in nearly every state.

Another likely casualty of these deals is the momentum hospitals have established to move the

nation’s health care system forward. Despite the commercial insurers’ recent claims that they are

fostering innovation, they continue to benefit financially from letting hospitals do most of the

hard work of reducing readmissions, improving (rigorously measured) patient quality,

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experimenting with accountable care organizations (ACOs) and bundling programs, instituting

population health programs and numerous other efforts designed to turn a system predicated on

volume to one measured by value. There is no reason to believe that allowing these insurers to

become even larger and more immune from competitive forces would alter their incentive to sit

mostly on the sidelines and reap the considerable financial rewards of providers’ innovation.

Neither of the proposed acquisitions should be permitted to move forward until federal and state

antitrust and insurance authorities can offer assurances that they are procompetitive, will not

leave consumers with fewer and more expensive options for coverage or diminish insurers’

willingness to be innovative partners with providers to move our health care system beyond silos

to a continuum of care that is responsive to consumers’ needs.

SERIOUS CONCERNS ABOUT HEALTH INSURANCE CONSOLIDATION

The AHA recently shared with the Department of Justice’s Antitrust Division (Department) our

serious concerns about the recently announced acquisitions; the two letters are attached.1 These

deals would eliminate two of the largest national health insurance companies, leaving just three

dominant providers of health insurance, and an even more consolidated health insurance

market. Recent American Medical Association (AMA) data on health insurance concentration

confirms that consolidation is widespread – 70 percent of health insurance markets are “highly

concentrated.”2

Concentration Matters. A recent study3 in Technology Science highlighted why this increasing

concentration should be of particular concern. It found that the largest issuer in each state not

only raised premiums by higher amounts, but also raised premiums on more of their plans than

other issuers in the same state.

Anthem’s Acquisition of Cigna Threatens to Reduce Competition on a Massive Scale.

The potential harm to consumers from the loss of competition that could result

from the Anthem/Cigna transaction is large and durable. Because the two

companies generate more than $100 billion in revenue, even a modest price

increase would cost consumers billions of dollars in higher health care costs.4

The geographic reach of the transaction would be sweeping. It threatens to reduce competition

for commercial health insurance in at least 817 markets across the U.S. that serve 45 million

consumers. In each of these markets the transaction would produce a Herfindahl-Hirschman

Index (HHI) score of 2,500 or more, which the merger guidelines indicate either raise serious or

virtually insurmountable competitive issues.

The parties’ attempt to explain away the substantial competition between them by creating

artificial “submarkets” (by, we assume, customer category and/or policy type) should be viewed

with great skepticism. Typically, when companies go to such lengths, it is to obscure competitive

overlaps in a desperate effort to demonstrate that a market is competitive. In fact, both

companies acknowledge in their public statements that they compete vigorously for the same

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group of customers, including large group customers. Moreover, even if such market

stratification were valid and the companies do not actually compete in the regions in which they

both actively sell commercial insurance, it would reflect enormously high entry barriers and raise

questions about anticompetitive coordination (which also should be investigated) and, of course,

underscore the deal’s enormous anticompetitive potential.

The durability of the anticompetitive impact is enhanced because of the high barriers to entry in

the health insurance market. A former Acting Assistant Attorney General modestly described

entry as “difficult,” particularly in concentrated markets like those at issue in this

transaction. One of the very few new companies to even attempt entry described it as “quite

daunting.”5 Just last week, the New York Times reported on the demise of a number of health

insurance start-ups, concluding that “the [health insurance] marketplace is proving hostile to

newcomers trying to break into the industry dominated by powerfully entrenched businesses.”6

Claims of offsetting efficiencies cannot ameliorate the competitive harm from this deal. Insurers

have a dismal track record of passing any savings from an acquisition on to consumers, and there

is no reason to believe that this transaction would be any different.7 In addition, neither of the

legislated controls on excessive premium hikes – medical loss ratio (MLR) or rate review – are

sufficient to prevent Anthem from raising rates to consumers above competitive levels.

The MLR measures how much of the premium dollar goes to pay for medical claims and quality

activities instead of administrative costs and marketing. Despite its seeming promise, the MLR

will not be effective in controlling premium cost increases because: the MLR requirements apply

to fewer than 50 percent of Americans under age 65 with health insurance coverage; the rules for

reporting MLRs may mask differences in premiums rate increases; and the MLR does not

address the level of the premium increase, only the percentage used for claims and quality

activities.

Likewise, insurance rate review will not prevent rate hikes. Neither the Department of Health

and Human Services nor most states have the power to prevent a rate hike. For example, an

article in the August 27 Wall Street Journal8 reported that officials had “greenlighted” hikes in

health insurance rates of more than 36 percent in Tennessee, 25 percent in Kentucky and 23

percent in Idaho.

Another concern is that Anthem’s affiliation with the Blue Cross and Blue Shield (Blue) system

raises some particular competitive concerns. An August 2015 letter9 from Joe R. Whatley, Jr., to

the Department described the Blue Cross Blue Shield Association’s license agreement that

prevents the individual Blue plans from directly competing against one another, and also

prevents their non-Blue subsidiaries from competing even slightly vigorously against other Blue

companies. The letter stated:

Because Anthem cannot expand its non-Blues business, an evaluation of the

effects of its merger with Cigna must include not only those geographic markets

in which Cigna competes with Anthem, but also those geographic markets where

Cigna competes (or would compete) with any other insurers. In each of those

markets … Cigna can no longer compete for new business in any market unless it

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decreases its business by an offsetting amount in another market. The net effect is

that Cigna’s effectiveness as a competitor … will be impaired.

The letter may only have partially captured the extensive interconnections between Anthem and

the other BlueCard members that appear likely to eliminate competition between Cigna and

every Blue plan in every state. In fact, the letter may understate the coordination likely to result

between Cigna and the non-Anthem Blues plans.

As a result of the folding of Cigna into the overall Blue system through Anthem’s Blues

affiliation, this deal may augment the already considerable power of the Blue plan in every

state. The AMA data report that Blues plans tend to be the most dominant plan in virtually every

state in which they operate. Because of the way in which the Blue system operates, Blues plans

nationwide may now be able to control Cigna lives – particularly for BlueCard members,

including national employer accounts – as their own when they negotiate with providers for

rates, terms and conditions under which coverage is available to consumers. If so, this would

give these Blues plans even more market power to block entry into their local markets and to

constrict plan design and reimbursement rates by, for example, further narrowing provider

networks available to consumers and/or driving down rates for those in the network below

competitive levels and causing some to decline to participate in any network. The Blues’ control

over provider reimbursement would increase their ability to put new plans and those hoping to

expand at a competitive disadvantage by depriving providers of the flexibility and options to

work effectively with those new insurance competitors.

At a time of rising health insurance premiums, the Department and state Attorneys General

should examine closely how this acquisition could increase Blue plan dominance

nationwide. Blue Cross dominance has been an issue the Department has been concerned with in

previous health insurance consolidations. In a speech by former Assistant Attorney General

Christine Varney10, she noted that local health plan dominance (i.e., Blue plan dominance)

creates barriers to entry. And, the department has challenged two Blue plan mergers that would

have increased that dominance. Given the size and scope of this deal and the dominance of the

Blue plans nationwide, the Department should thoroughly investigate how the addition of Cigna

to the Blues’ arrangement could further entrench that widespread dominance and decrease

competition, reduce the number of participating providers and lead to higher consumer

premiums.

While it may have been sufficient in the past, it is unlikely that divestitures, no matter how

numerous, could rescue this deal. As we noted in our letter to the Department, in “the 817 at-risk

markets, over half of the lives that need to be divested reside across 368 MSAs (metropolitan

statistical areas) and rural counties [where there is] no divestiture possibility that is likely to

preserve” the benefits of competition. Significantly, it has been reported that the divestitures

required for two deals overseen by the Federal Trade Commission (FTC) are floundering. That is

significant because the divestitures for both deals were much less numerous than those likely to

be required for an Anthem/Cigna combination.11 The report highlighted the problems the

antitrust agencies face in trying to turn “smaller firms into large competitors capable of

absorbing major divestitures.”

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Further, the deal could eliminate an irreplaceable source of competition for national accounts and

large regional customers. The FTC recently prevailed in a case where it found a national market

despite the parties’ claims the market was more segmented and localized.12 Both Cigna and

Anthem serve national accounts (large multi-state employers) and large regional customers. As

recently as the first quarter of 2015, Anthem’s president and CEO told investors it was

“optimistic” about the 2016 outlook for national accounts and had closed on two new large

accounts serving several hundred thousand lives.13 In its second quarter 2015 earnings call with

investors, Anthem’s chief financial officer and executive vice president suggested its Blues

affiliation was an “instrumental part” of its success with national accounts.14

Aetna’s Acquisition of Humana Could Further Concentrate MA Markets Already

Suffering from a Lack of Competitive Alternatives. Nearly 18 million people obtain their

health insurance through MA, and that number is growing rapidly: “The total Advantage

population is up 7.3 percent from … this time last year, according to the latest CMS data.”15

More than 2.7 million seniors are enrolled in MA plans operated by these insurers in more than

1,000 markets that would become highly concentrated if Aetna is permitted to acquire Humana

(this estimate uses the HHI). The deal would not only eliminate current competition between

Aetna and Humana in the MA market, it also would eliminate the possibility of future

competition between them. Humana is the second-largest MA insurer with 3.23 million members

(an 11.4 percent increase over last year), and Aetna the fourth largest with 1.27 million

members.16 As recently as 2014, Aetna appeared to believe it was capable of growing its MA

business substantially without this acquisition.17

This is particularly concerning as there is almost a complete lack of competition in MA markets,

according to an August 2015 report by the Commonwealth Fund18, which found that 97 percent

of MA markets in U.S. counties are “highly concentrated.” This confirms the findings of a recent

report by the Kaiser Family Foundation19 that also described MA markets as highly

concentrated. That report also noted that, while the MA program has continued to grow in

virtually all states, MA plans now provide less financial protection for enrollees and average out-

of-pocket expenses have continued to climb; this is not an unexpected development in such

highly-concentrated markets.

A somewhat perplexing new report from Avalere20 suggests that both the Commonwealth Fund

and Kaiser are wrong. The report claims there is new market entry and growth, as well as

diversification in MA markets. These new entrants mainly comprise a Blue plan and 15 provider-

owned plans. While provider-owned plans offer seniors an excellent choice in the geographic

areas they cover, they cannot begin to replace the loss of competition in more than 1,000 markets

in 38 states for the 2.7 million seniors that are at risk because of this transaction. Furthermore,

some skepticism should be applied to any characterization of a Blue plan as a new entrant into a

health insurance market.

The Department has viewed MA as a separate product market because of its unique

characteristics. Both lower out-of-pocket costs and a more extensive benefit design have

distinguished it from traditional Medicare. While payments to MA plans have moderated, the

financial protection and greater range of benefits offered by MA plans continue to attract seniors

in large numbers, despite predictions that lowered payments would have the opposite effect.

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The high barriers to market entry and lack of efficiencies present in the Anthem deal are present

here as well. The remedy the Department has relied on in previous health insurance deals – a

series of MA plan divestitures – is unlikely to be sufficient to remediate the likely competitive

harm from this deal. The difficulty of implementing successfully this structural remedy should

not be underestimated – a suitable acquirer would need to be identified in 1,083 counties in 38

states serving more than 2.7 million current Aetna and Humana members. Even if it were

feasible, which it likely is not, it would be a staggering task to develop, implement and supervise

these divestitures in a manner that did not further erode the competitive equilibrium in these

markets and harm seniors, as well as the promise of the MA program itself.

WHY HOSPITAL DEALS ARE DIFFERENT

Hospitals’ Realignment. Hospitals have shouldered much of the heavy burden of reshaping the

nation’s health care system to meet the laudable goals of improving quality and efficiency and

making care more affordable for patients and families. And hospitals have made significant

strides toward meeting all of those goals. A July 2015 study, reported in the Journal of the

American Medical Association, described it as a “medical hat trick:”21

In this comprehensive analysis of the hospital trends in the Medicare fee-for-

service populations aged 65 years and older, there were marked reductions in all-

cause mortality rates, all-cause hospitalization rates, and inpatient expenditures, as

well as improvements in outcomes during and after hospitalization.

Unlike the insurance deals, which appear motivated by top-line profits, hospital realignment is a

procompetitive response to the major forces reshaping the health care system:

Widespread recognition, especially among those in the hospital field, of the need to

replace a “siloed” health care system with a continuum of care that improves

coordination and quality and reduces costs for patients;

Changes in reimbursement models to reward value and encourage population health;

Increased capital requirements; and

Competition that is rapidly changing how services are delivered.

Building a Continuum of Care. Building a continuum demands that providers be more

integrated. Integration can take many forms – hospitals, physicians, post-acute care providers

and others in the health care chain can integrate clinically or financially, horizontally or

vertically, and the relationships can range from loose affiliations to complete mergers – and it is

happening across the country. For example, a large teaching hospital in Virginia is partnering

with other hospitals in the state to form a regional health care system; a New Orleans health

system is partnering with four other hospitals across the state to launch a network to provide

patients with access to 25 medical facilities and more than 3,000 physicians; and hospitals in

Michigan partnered to create a regional affiliation allowing a critical access hospital’s patients

access to the full array of services offered by the larger system. In addition, two prestigious

teaching hospitals in California have teamed up with a local acute rehabilitation hospital to

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develop a world-class regional center for treating complex rehabilitation cases from around the

nation.

Hospitals and patients benefit when a hospital realigns. The most common benefits are improved

coordination across the care continuum, increased operational efficiencies, greater access to cash

and capital for smaller or financially distressed hospitals, and support for innovation, including

payment alternatives that entail financial risk. For financially struggling hospitals, finding a

partner can make all the difference. For example:

A health system in Ohio acquired a small, community hospital in bankruptcy with closure

impending; it expanded access to care in the rural area, increased technological

efficiencies and saved 250 community jobs.

An acquisition by a nearby hospital system of a hospital that was struggling financially

led to it being transformed into a much-needed regional children’s hospital, which

provided improved access and services for area children.

Regulatory Barriers Persist for Integration. While innovative partnerships and integrative

arrangements abound throughout the country, permanent arrangements, such as mergers, offer

the most protection from a staggering array of outdated regulatory barriers that make integration

risky when Medicare or Medicaid patients are involved. Despite the AHA having identified the

five main barriers to clinical integration more than 10 years ago, to date, only one regulatory

barrier has been addressed. The following barriers remain:

Lack of antitrust guidance on clinical integration (current guidance applies only to

arrangements that are part of ACOs);

Restrictions on arrangements that base payments on achievements in quality and

efficiency instead of just hours worked (Stark Law);

Restrictions on financial incentives to physicians that could be construed as influencing

care provided, even if the goal of the incentive is to adopt proven protocols and

procedures to improve care (Anti-kickback law); and

Uncertainty about how the Internal Revenue Service will view payments from tax-

exempt hospitals to non-tax exempt physicians working together in clinically integrated

arrangements.

It is notable that all these barriers to clinical integration had to be addressed to allow the ACO

program to move forward. Yet, the federal agencies responsible for administering these laws and

regulations have yet to modernize them, with one limited exception, to support even more

progress toward building a continuum of care through innovative arrangements like those

described above.

MOVING TO A VALUE-BASED REIMBURSEMENT SYSTEM

Increasingly, reimbursement models are being recast to compensate providers based on

outcomes, not the volume of services provided. The outcomes being rewarded include keeping

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patients well (population health) and providing high-quality services when patients are in the

hospital.

Many hospitals, health systems and payers are adopting delivery system reforms with the goal of

better aligning provider incentives to achieve higher-quality care at lower costs. These reforms

include forming ACOs, bundling services and payments for episodes of care, developing new

incentives to engage physicians in improving quality and efficiency, and testing payment

alternatives for vulnerable populations. The Centers for Medicare & Medicaid Services (CMS)

recently announced a goal of moving 30 percent of Medicare payments to alternative models of

reimbursement that reward value by 2016 and to 50 percent of payments by 2018. In its

announcement, CMS recognized that achieving these goals would require hospitals to “make

fundamental changes in their day-to-day operations that improve the quality and reduce the cost

of health care.”

Hospitals have supported these efforts and often take the lead in testing and improving them. In

addition, hospitals are collaborating with and learning from each other in order to improve the

quality of care they deliver to patients. For example, the Health Research & Educational Trust

(HRET), an AHA affiliate, was awarded a contract by CMS to support the Partnership for

Patients campaign, a three-year, public-private partnership designed to improve the quality,

safety and affordability of health care for all Americans. The AHA/HRET Hospital Engagement

Network project helped hospitals adopt new practices with the goal of improving patient care and

reducing readmissions by 20 percent. The project, which included a network of nearly 1,500

hospitals across 31 states, focused on several areas of impact and produced cost savings of $988

million through improved care. Some additional highlights include: a 61 percent reduction in

early elective deliveries across 800 birthing hospitals; a 48 percent reduction in venous

thromboembolism (blood clot in a vein) across 900 hospitals; and a 54 percent reduction in

pressure ulcers across 1,200 hospitals.

Meanwhile, many hospitals report that it has been difficult to work with commercial insurers in

moving to new payment models. We recently surveyed members of AHA’s nine regional policy

boards, which represent hundreds of hospitals around the nation, about their experience working

with commercial insurers on new payment models. About 80 percent reported it was a challenge

to work with insurers on new payment models, and more than 40 percent described it as a major

challenge.

INCREASED CAPITAL REQUIREMENTS

The fundamental restructuring that CMS anticipates in response to its alternative reimbursement

models will undoubtedly come with a high cost that will be particularly difficult to bear for small

and stand-alone hospitals. Already, the field is under serious financial pressure from the need for

capital expenditures, particularly those for health information technology (IT) and electronic

health records (EHRs). In fact, the AHA estimates that hospitals collectively spent $47 billion on

IT, including EHRs, each and every year between 2010 and 2013.

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EHRs are essential to improving care and, consequently, succeeding in value-based

reimbursement models. Every hospital is expected to meet a constantly evolving set of standards

for having and using EHRs for their patients. And a portion of Medicare and Medicaid

reimbursement is conditioned on EHR adoption and use. Estimates are that EHRs will cost a

hospital between $20 and $200 million depending on their size. For smaller, rural and stand-

alone hospitals, these costs can be ruinous without a partner to absorb some of the cost and

provide the necessary technical expertise.

For many hospitals, the credit markets are already difficult to access. The most recent

FitchRating report confirms this; starting in 2011, the profitability “metrics” for the lowest-rated

hospitals have declined.22 The lowest-rated hospitals tend to be smaller or stand-alone. The debt

burden for the lowest-rated hospitals also has continued to grow, and the hospitals’ operating

margins are razor thin. For these hospitals, accessing the credit markets for capital

improvements, including technology, will be difficult, if at all possible. Without a partner, these

hospitals will continue to decline until they are forced to close their doors, with potentially

devastating repercussions for the communities they serve.

NEW COMPETITION FOR HOSPITAL SERVICES

Rapid changes in the health care market are providing consumers with an increased array of

options for their health care, including services that hospitals provide.

CVS, Walgreens and Wal-Mart, among others, are changing where consumers go for their health

care needs. The retailers offer an array of health care services, including primary care,

immunizations, blood pressure monitoring and routine blood tests, all of which were formerly

available only in a doctor’s office or hospital outpatient clinic or emergency room. Meanwhile,

many of the retailers plan to provide even more sophisticated care and services at their thousands

of convenient locations. These developments challenge hospitals to become more integrated with

physicians and other providers so that they too can offer convenient and more affordable care

that is attractive to patients.

In addition, telehealth promises to revolutionize how an incredible array of health care services

are provided to consumers and to change the competitive landscape entirely. Telehealth is

already delivering services as different as dermatology and mental health to patients across town

and across the country. A hospital in Arlington, Va., has an arrangement with the Mayo Clinic,

which is based in Rochester, Minn., that allows its patients access to Mayo’s expertise without

leaving the neighborhood. In addition, a hospital system in California was able to cover its need

for physician intensivists at one of its satellite facilities using mobile telehealth devices instead of

hiring new doctors, with positive clinical and patient satisfaction outcomes. Increasingly, patients

are able to consult doctors using their computers, laptops and smartphones, and this is becoming

a more common expectation of patients when they seek care. For their part, insurers too are

increasingly relying on telehealth to reduce costs and meet network adequacy requirements. All

of this changes the competitive landscape for hospitals. Now, competitors for even specialized

services do not have to be in the same neighborhood, city or state to connect with patients who

might otherwise have sought care at their local hospital.

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The rapid growth of telehealth illustrates how quickly the competitive landscape can change for

hospitals and the importance of having adequate financial resources and access to capital.

Without those resources, hospitals cannot keep up with the demands of new technology or the

opportunities they present.

CONCLUSION

Consumers and the entire health care system are threatened by the potential consequences of the

unprecedented consolidation that would result from Anthem’s acquisition of Cigna and Aetna’s

acquisition of Humana. These health insurance deals, which would affect at least one form of

health insurance in every state, could mean fewer choices for consumers for commercial

insurance and MA plans, narrower networks of providers in what few choices remain and higher

prices for premiums or more out-of-pocket costs. The deals also could diminish insurers’

willingness to be innovative partners with providers, as well as jeopardize the momentum

hospitals have led to improve quality and efficiency while making care more affordable for

patients and families.

Some have compared the insurance deals to those in the telecommunications arena because of

their size and the enduring ability to contort the market and harm consumers. The Department

was ready to challenge the telecommunications deals, and it also should be ready to challenge the

insurance deals, if, as we expect, its intensive investigation confirms that these transactions

threaten the growth and vitality of our health care system and the health and welfare of

consumers across the nation.

1 www.aha.org/letters 2 Competition in Health Insurance A comprehensive study of U.S. markets, American Medical Association, 2015

Update, https://commerce.ama-

assn.org/store/catalog/productDetail.jsp?product_id=prod2680007&navAction=push#usage-tab. 3 Wang E, Gee G. Larger Issuers, Larger Premium Increases: Health insurance issuer competition post-ACA.

Technology Science. 2015081104. August 11, 2015. http://techscience.org/a/2015081104. 4 AHA letter to the Honorable William Baer, August 5, 2015. 5 This $1.5 billion Startup is Making Health Insurance Suck Less, Wired, March, 20, 2015

http://www.wired.com/2015/04/oscar-funding/. 6 Tough Going for Co-Ops, New York Times, September 15, 2015. 7 Testimony of Professor Thomas L. Greaney, Before the House of Representatives Subcommittee on Regulatory

Reform, Commercial and Antitrust Law, September 10, 2015. 8 Insurers Win Big Health-Rate Increases, Wall Street Journal, August 27, 2015.

http://www.wsj.com/articles/insurers-win-big-health-rate-increases-1440628848. 9 Joe R. Whatley, Jr., letter to the Honorable William Baer, August 13, 2015. 10Remarks of Christine Varney, then Assistant Attorney General of the DOJ’s Antitrust Division, at a joint

American Bar Association/American Health Lawyers Association Antitrust in Healthcare Conference, May 24,

2010, available at http://www.justice.gov/atr/speech/antitrust-andhealthcare 11Reporting on divestitures ordered in the car rental and grocery store industries. Divestitures required were 58 on-

airport locations and a line of business for the Hertz deal and 168 supermarkets in 130 locations for Albertsons.

http://pipeline.thedeal.com/tdd/ViewArticle.dl?s=dd&id=13291361&cmpid=em:DA091715#ixzz3m1SYWNdc

11

12 FTC v. Sysco Corp, (D.D.C.) June 23, 2015 at https://www.ftc.gov/system/files/documents/cases/150623syscomemo.pdf 13 Anthem Quarter 1 Earnings Call with Investors, April 29, 2015, http://www.thestreet.com/story/13131183/1/anthem-antm-earnings-report-q1-2015-conference-call-transcript.html. 14 Anthem Quarter 2 Earnings Call with Investors, July 29, 2015, http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTg4NjExfENoaWxkSUQ9Mjk2ODg1fFR5cGU9MQ==&t=1. 15 Medicare Advantage membership nearly 18 million ahead of annual enrollment, Modern Healthcare, September 17, 2015 (Modern). 16 Modern. 17 AHA letter to the Honorable William Baer and Secretary Burwell, September 1, 2015 (see chart page 16). 18 Brian Biles, Giselle Casillas, and Stuart Guterman, Competition Among Medicare’s Private Health Plans: Does It

Really Exist?, The Commonwealth Fund August 2015,

www.commonwealthfund.org/publications/issue-briefs/2015/aug/competition-medicare-private-plans-does-it-exist. 19 Gretchen Jacobson, Anthony Damico and Marsha Gold, Kaiser Family Foundation Issue Brief, Medicare

Advantage 2015 Spotlight: Enrollment Market Update, June 30, 2015, http://kff.org/medicare/issuebrief/medicare-

advantage-2015-spotlight-enrollment-market-update/. 20 New Market Entrants: Growth and Diversification in U.S. Health Insurance, Avalere, September 2015. 21 ‘Jaw-dropping’: Medicare deaths, hospitals AND costs reduced, USA Today, July 28, 2015. Reporting on

“Mortality, Hospitalizations, and Expenditures for the Medicare Population Aged 65 Years and Older, 1999-2013”,

Krumholz, Nuti, Downing, Normand & Wang, JAMA, July 28, 2015, Vol. 312, No. 4. 22 FitchRatings, 2015 Medium Ratios for Nonprofit Hospitals and Health Systems, Special Report, August 10, 2015.

By Email and Courier

September 1, 2015

The Honorable William Baer

Assistant Attorney General

United States Department of Justice Antitrust Division

950 Pennsylvania Avenue, N.W.

Washington, D. C. 20530

The Honorable Sylvia Burwell

Secretary

Department of Health & Human Services

200 Independence Avenue, S.W.

Washington, D.C. 20201

Dear Assistant Attorney General Baer and Secretary Burwell:

I’m writing on behalf of nearly 5,000 member hospitals, health systems and other health care

organizations, and 43,000 individual members of the American Hospital Association (AHA)

regarding the proposed acquisition involving two of the five major commercial health insurance

companies in the United States: Aetna’s proposed acquisition of Humana. We previously wrote

to the Department of Justice’s Antitrust Division (Department) on August 5, 2015, about the

proposed acquisition of Cigna by Anthem. That letter is attached.

Our concerns about the proposed Aetna/Humana deal are similar in many respects. Both have the

very real potential to reduce competition substantially, increase the cost of premiums, and

diminish the insurers’ willingness to be innovative partners with providers and consumers in

transforming health care. Viewed in tandem the two deals would reduce the number of major

health insurers from five to three and adversely impact millions of consumers.

The proposed Aetna/Humana deal raises particular concerns about an adverse impact on the

Medicare Advantage program. More than 2.7 million seniors are enrolled in Medicare advantage

plans operated by the companies in more than 1,000 markets that would become highly

concentrated. In previous investigations the Department has viewed Medicare Advantage

markets as distinct from traditional Medicare, “[d]ue in large part to the lower out-of-pocket

The Honorable William Baer

The Honorable Sylvia Burwell

September 1, 2015

Page 2 of 20

costs and richer benefits that many Medicare Advantage plans offer seniors over traditional

Medicare.” United States v. UnitedHealth Group Inc. and Sierra Health Services, Inc.1

Yet, some of the benefits Medicare Advantage plans offer may be eroding. This erosion is not

the result of legislative changes to the program in the Affordable Care Act but is due in

significant part to the lack of robust competition among Medicare Advantage plans. A recent

Kaiser Family Foundation report described Medicare Advantage markets as “highly concentrated

among large firms.” It also cautioned that while enrollment in the Medicare Advantage program

has continued to grow and increase in virtually all states, Medicare Advantage plans “provide

less financial protection to Medicare enrollees than they have in the past ….[and] [a]verage out-

of-pocket spending limits have continued to rise.”2 The almost complete absence of competition

in Medicare Advantage markets was highlighted in a report just issued by the Commonwealth

Fund. The report studied the state of competition in every Medicare Advantage market and found

“97 percent of markets in U.S. counties are highly concentrated and therefore lacking in

significant Medicare Advantage plan competition.”3

The substantial barriers to entry in the health insurance sector make it extraordinarily unlikely

that existing firms could replicate the size and scope of the insurers involved in this proposed

transaction. This strongly suggests that the acquisition likely would serve only to exacerbate

problematic coverage and cost trends as well as produce other adverse impacts on access and

innovation. Significantly, it appears doubtful that divestitures alone would remedy the loss of

competition threatened by this acquisition.

The attached analysis details the competitive issues that the Department will consider as it

reviews this deal and the precedents that suggest it is, and should be, at risk. We understand that

the Department will work closely with the Department of Health and Human Services (HHS) in

understanding fully the potential anticompetitive impacts of the deal on the Medicare Advantage

program. We look forward to working with both agencies throughout the course of this

investigation. To that end, we will be contacting representatives of both agencies to request

meetings with top officials and staff to discuss more fully our concerns and ways in which we

can be of assistance.

For more information, you can contact me directly at mhatton@aha.org or (202) 626-2336.

1 Competitive Impact Statement, United States v. UnitedHealth Group Inc. and Sierra Health Services, Inc., No. 08-

cv-322 (D.D.C. Feb. 25, 2008), available at www.justice.gov/atr/case/us-v-unitedhealth-group-inc-and-sierra-

health-services-inc. 2 Gretchen Jacobson, Anthony Damico and Marsha Gold, Kaiser Family Foundation Issue Brief, Medicare

Advantage 2015 Spotlight: Enrollment Market Update, (June 30, 2015), available at http://kff.org/medicare/issue-

brief/medicare-advantage-2015-spotlight-enrollment-market-update/. 3 Brian Biles, Giselle Casillas, and Stuart Guterman, Competition Among Medicare’s Private Health Plans: Does It

Really Exist?, The Commonwealth Fund (August 25, 2014), available at

www.commonwealthfund.org/publications/issue-briefs/2015/aug/competition-medicare-private-plans-does-it-exist.

The Honorable William Baer

The Honorable Sylvia Burwell

September 1, 2015

Page 3 of 20

Sincerely,

/s/

Melinda Reid Hatton

Senior Vice President & General Counsel

cc: Andy Slavitt, Acting Administrator for the Centers for Medicare & Medicaid Services

Attachment

The Honorable William Baer

The Honorable Sylvia Burwell

September 1, 2015

Page 4 of 20

Detailed Analysis of the Aetna/Humana Merger

Submitted by the American Hospital Association

On behalf of the nearly 5,000 members of the American Hospital Association, we urge that the

Department of Justice’s Antitrust Division (Department) thoroughly investigate Aetna’s

proposed $37 billion acquisition of Humana.4 The transaction is likely to lessen competition

substantially in violation of Section 7 of the Clayton Act.5 The harm the transaction threatens to

consumers—and particularly to senior citizens and other vulnerable populations who depend on

Medicare Advantage programs for their health care—is large and durable. Almost one in three

Medicare beneficiaries, amounting to 16.8 million people, obtain their health care through a

Medicare Advantage plan.6 Yet, as the Kaiser Family Foundation observed in a recent report,

“Medicare Advantage enrollment … tends to be highly concentrated among a small number of

firms.”7 Humana and Aetna are leaders in this critical market. Their merger will increase already

high levels of concentration even further, making the combined company the largest Medicare

Advantage insurer in the country with one million more members than the current largest insurer,

UnitedHealthcare.8 The resulting loss of competition will harm seniors by making it considerably

more difficult for them to obtain affordable, comprehensive health care coverage.

1. The Parties

A. Aetna

Aetna is one of the nation’s largest health insurance companies, with $58 billion in revenues in

2014.9 The company is financially strong, and boasted of “strong growth” in its “core

businesses” in 2014, when it set records in both operating revenues and operating earnings.10

4 Aetna news release, available at https://news.aetna.com//aetna-to-acquire-humana/. 5 15 U.S.C. § 18. 6 Gretchen Jacobson, Anthony Damico, and Marsha Gold, Kaiser Family Foundation Issue Brief, Medicare

Advantage 2015 Spotlight: Enrollment Market Update, (June 30, 2015), Figure 1, available at

http://kff.org/medicare/issue-brief/medicare-advantage-2015-spotlight-enrollment-market-update/ (hereafter “KFF

June 2015 Issue Brief”). 7 Id. at 13. In fact, in a report released just days ago, The Commonwealth Fund found that 2,852 of the 2,933

counties studied (97 percent) have “highly concentrated” MA markets, using the definition for that term set forth in

the Department of Justice’s merger guidelines. Brian Biles, Giselle Casillas, and Stuart Guterman, Competition

Among Medicare’s Private Health Plans: Does It Really Exist?, The Commonwealth Fund (August 25, 2014),

available at www.commonwealthfund.org/publications/issue-briefs/2015/aug/competition-medicare-private-plans-

does-it-exist. 8 KFF June 2015 Issue Brief at Fig. 14; see also Anna Wilde Mathews, Liz Hoffman, Dana Mattioli, With Merger

Deal, Aetna, Humana Get Ahead of the Pack, Wall Street Journal (July 6, 2015) (the combined companies “would

have about a million more members in Medicare Advantage … than their next-closest competitor, UnitedHealth”),

available at www.wsj.com/articles/with-merger-deal-aetna-humana-get-ahead-of-the-pack-1436143581. 9 Aetna Annual Report (2014) at 2, available at http://phx.corporate-

ir.net/External.File?item=UGFyZW50SUQ9NTc0OTUyfENoaWxkSUQ9Mjc4NDQyfFR5cGU9MQ==&t=1. $55

billion are derived from Aetna’s health care businesses. 10 Id.

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September 1, 2015

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Aetna offers a full range of health care insurance products. In 2014, 23.5 million people received

medical coverage through Aetna. These included people for whom Aetna provided medical

insurance and those who received coverage through self-insured employers that contracted with

Aetna for administrative services.11 Aetna added approximately 1.4 million medical members

between 2013 and 2014, thereby growing its membership at a rate of about 6 percent.12

“One of the keys” to Aetna’s results in 2014, its chairman reported in his annual letter to

shareholders, “was the strength of our Government business, which now represents over 40

percent of Aetna’s total health premiums.”13 Premiums in the company’s government business

grew dramatically in 2014, “primarily driven by Medicare Advantage membership growth of

almost 18 percent” and by strong Medicare Supplement growth as well.14 The company has

Medicare Advantage enrollees in every state in the country, other than North Dakota.

B. Humana

Humana also is one of the largest health insurers in the U.S., with more than $48 billion in total

revenues in 2014.15 It has almost 14 million medical members.16

The company has long been a leader in Medicare products. The company offers at least one

Medicare product in every state.17 Humana today is the second largest Medicare Advantage

insurer in the U.S., just behind UnitedHealthcare.18 Fully 54 percent of Humana’s revenues

derive from Medicare Advantage products.19 Total Medicare Advantage membership increased

18 percent between 2013 and 2014.20 Humana claims that its strength in Medicare Advantage

provides it “with greater ability to expand our network of PPO and HMO providers” and so it is

well positioned to maintain and expand its strength in Medicare Advantage markets.21

2. Application of the Antitrust Laws to this Transaction

As noted in the analysis of the Anthem/Cigna transaction we provided on August 5, 2015,22

health insurance competition is vital if the promise of increased access to affordable health

insurance coverage, embodied in the Affordable Care Act (ACA), is to be realized. The

11 Aetna Annual Report (2014) at 10. 12 Id. 13 Mark T. Bertolini, Chairman and CEO, Letter to shareholders (April 2015), available at http://phx.corporate-

ir.net/External.File?item=UGFyZW50SUQ9NTc0OTUyfENoaWxkSUQ9Mjc4NDQyfFR5cGU9MQ==&t=1. 14 Id. 15 Humana 10-K for YE 2014 (attached to 2014 Annual Report), at 81, available at http://phx.corporate-

ir.net/External.File?item=UGFyZW50SUQ9NTcyNjgzfENoaWxkSUQ9Mjc0NTQ3fFR5cGU9MQ==&t=1. 16 Id. at 12; see also id. at 38. 17 Id. at 5. 18 KFF June 2015 Issue Brief at Fig. 14. 19 Humana 10-K for YE 2014 (attached to 2014 Annual Report), supra, at 5. 20 2014 Annual Report, supra, at 3. 21 Humana 10-K for YE 2014 (attached to 2014 Annual Report), supra, at 5. 22 Letter from Melinda Reid Hatton to William Baer, at 7 (August 5, 2015), available at

http://www.aha.org/advocacy-issues/letter/2015/150805-let-acquisitions.pdf.

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September 1, 2015

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Department, which has reviewed carefully every health insurance merger in recent years, has

been adamant that competition must be preserved among insurers. The Acting Assistant Attorney

General in charge of the Antitrust Division remarked three years ago that “the division has

brought a number of enforcement actions against health insurance mergers” as part of its

“commitment to carefully review mergers in the health insurance industry and challenge those

mergers that may substantially lessen competition in properly defined markets.”23

To fulfill this commitment to protect competition in health insurance markets, the Department

has filed many actions against insurers seeking to merge or otherwise act anticompetitively.24

Significantly, in two of the cases filed over the last several years involving mergers of health

insurers, the Department recognized the particular importance of preserving competition in the

Medicare Advantage market:

In 2008, after UnitedHealth proposed to acquire Sierra Health Services, the Department

sued to protect competition in the provision of Medicare Advantage plans in Las Vegas.25

The Department noted Congress created Medicare Advantage “as a private market

alternative” to the traditional Medicare program. “In establishing the Medicare

Advantage program, Congress intended that vigorous competition among private

Medicare Advantage insurers would lead insurers to offer seniors richer and more

affordable benefits than traditional Medicare, provide a wider array of health-insurance

choices, and be more responsive to the demands of seniors.” The Department alleged the

proposed merger would end all competition between UnitedHealth and Sierra, thereby

“eliminating the pressure that these close competitors place on each other to maintain

attractive benefits, lower prices, and high-quality health care.”26 The Department settled

the complaint through entry of a consent decree that required the merged company to

preserve competition in the market for Medicare Advantage in Las Vegas by divesting

individual Medicare Advantage lives in the two counties encompassing that city.27

23 Sharis A. Pozen, Acting Assistant Att’y Gen., Dep’t of Justice Antitrust Div., Competition and Health Care: A

Prescription for High-Quality, Affordable Care (Mar. 19, 2012), at 4, 6, available at

www.justice.gov/atr/speech/competition-and-health-care-prescription-high-quality-affordable-care. Less than two

year earlier, Christine Varney, then Assistant Attorney General of the DOJ’s Antitrust Division, made a similar point

in remarks given to a joint American Bar Association/American Health Lawyers Association

Antitrust in Healthcare Conference, (May 24, 2010), available at http://www.justice.gov/atr/speech/antitrust-and-

healthcare. 24 Several cases brought by the Department to protect competition in health insurance markets are discussed in the

Pozen speech, supra n.8. Others are identified in the AHA’s August 5 letter, supra n.6, at 7 n.19. 25 Complaint, United States v. UnitedHealth Group Inc. and Sierra Health Services, Inc., No. 08-cv-322 (D.D.C.

Feb. 25, 2008), available at www.justice.gov/atr/case/us-v-unitedhealth-group-inc-and-sierra-health-services-inc. 26 Id. at ¶ 3. 27 Final Judgment United States v. UnitedHealth Group Inc. and Sierra Health Services, Inc., No. 08-cv-322

(D.D.C. Sept. 24, 2008), available at www.justice.gov/atr/case/us-v-unitedhealth-group-inc-and-sierra-health-

services-inc; see also Competitive Impact Statement (Feb. 25, 2008) (available at same website).

The Honorable William Baer

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September 1, 2015

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In 2012, the Department sued to block the proposed acquisition by Humana Inc. of

Arcadian Management Services, Inc.28 The Department charged the proposed acquisition

would “significantly lessen competition among Medicare Advantage plans and eliminate

substantial head-to-head competition between Humana and Arcadian in the provision of

such plans” in 45 relevant geographic markets.29 The competition between the two

companies, the Department noted, “has significantly benefited thousands of seniors” who

look to Medicare Advantage plans to obtain “greater benefits than those available under

traditional Medicare.”30 The Department resolved the complaint when the merging

companies agreed to divest individual Medicare Advantage business in each of the

relevant geographic markets.31 Without the divestitures, the Department warned, “[t]he

loss of competition from the acquisition likely would result in higher premiums and

reduced benefits and services in these markets.”32

A. Relevant Product Market

1. The Medicare Advantage Program

a. Medicare Advantage Before The Passage Of The ACA

The Department demonstrated a thorough understanding of the Medicare Advantage market in

the complaints and competitive impact statements filed in the UnitedHealth/Sierra and

Humana/Arcadian transactions.33 As the Department noted there, in the traditional, government-

operated Medicare program, a beneficiary generally receives coverage for hospital services under

Part A of the program for free if he or she worked and paid Medicare taxes. A beneficiary may

elect to receive coverage for physician and other outpatient services under Part B upon payment

of a premium. To receive prescription drug coverage a beneficiary enrolled in traditional

Medicare program must enroll in a Medicare prescription drug plan under Medicare’s Part D for

an additional monthly premium.

28 Complaint, United States v. Humana Inc. and Arcadian Management Services, Inc., No. 12-cv-464 (D.D.C.,

March 27, 2012), available at www.justice.gov/atr/case/us-v-humana-inc-and-arcadian-management-services-inc. 29 Id. at ¶ 4. 30 Id. 31 Final Judgment, United States v. Humana Inc. and Arcadian Management Services, Inc., No. 12-cv-464 (D.D.C.,

Sept. 21, 2012), available at www.justice.gov/atr/case/us-v-humana-inc-and-arcadian-management-services-inc.;

see also Competitive Impact Statement (March 27, 2012) (available at same website). 32 Competitive Impact Statement, United States v. Humana, supra, at 1. 33 United States v. UnitedHealth Group Inc. and Sierra Health Services, Inc., No. 08-cv-322, available at

www.justice.gov/atr/case/us-v-unitedhealth-group-inc-and-sierra-health-services-inc.; United States v. Humana Inc.

and Arcadian Management Services, Inc., No. 12-cv-464, available at www.justice.gov/atr/case/us-v-humana-inc-

and-arcadian-management-services-inc.

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September 1, 2015

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The Part B premium for most beneficiaries in 2015 is $104.90 per month.34 The cost of a stand-

alone Part D plan varies widely, but in 2015 averages about $38.80 per month.35 Assuming a

beneficiary obtains covered medical services, he or she may incur substantial additional costs:

The deductible for hospitalization under Medicare Part A is $1,260 in 2015. If a hospital

stay lasts longer than 60 days, prescribed coinsurance amounts must be paid by the

beneficiary.36

The deductible for Medicare Part B this year is $147.37

o Once beneficiaries meet the deductible, they typically must pay 20 percent of the

Medicare allowed amounts.

There is no annual limit on out-of-pocket costs incurred under either Part A or Part B. “If

beneficiaries want to limit potentially catastrophic out-of-pocket costs, they need to

purchase a separate Medicare Supplement plan.”38

Medicare Advantage plans must provide all Medicare-covered services (Parts A and B).

Beneficiaries pay a premium established by the plan and are responsible as well for the Part B

premium. From the point of view of beneficiaries, there are many differences between Medicare

Advantage and traditional Medicare. Some of the critically important differences include:

Additional benefits. Medicare Advantage plans may (and usually do) provide benefits

not provided by Medicare. These additional services often include dental and vision

benefits, and may include hearing and health and wellness programs.39

Prescription drug coverage. The overwhelming majority of Medicare Advantage

enrollees (88 percent) participate in a plan (an MA-PD) that includes a prescription drug

benefit.40

34 Medicare.gov, Medicare 2015 costs at a glance, available at www.medicare.gov/your-medicare-costs/costs-at-a-

glance/costs-at-glance.html. Beneficiaries with modified adjusted gross incomes above $85,000 for individuals and

$170,000 for joint filers are charged higher amounts. Id. 35 See Jack Hoadley et al., Medicare Part D: A First Look at Plan Offerings in 2015, Kaiser Family Foundation (Oct.

10, 2014), available at http://kff.org/report-section/medicare-part-d-a-first-look-at-plan-offerings-in-2015-key-

findings/; see also Medicare.gov, Monthly Premium for Drug Plans, www.medicare.gov/part-d/costs/part-d-

costs.html. 36 These can be substantial: $315 per day for days 61-90 and $630 after that for a prescribed number of “lifetime

reserve days” after which the beneficiary must pay the entire amount incurred. Medicare 2015 costs at a glance,

supra. 37 Medicare 2015 costs at a glance, supra. 38 Competitive Impact Statement, United States v. UnitedHealth, supra, at 5. 39 See generally Medicare.gov, Medicare Advantage plans cover all Medicare services, available at

www.medicare.gov/what-medicare-covers/medicare-health-plans/medicare-advantage-plans-cover-all-medicare-

services.html. 40 KFF June 2015 Issue Brief at 7.

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September 1, 2015

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o The standard Part D benefit design has a $320 deductible and requires 25 percent

coinsurance up to $2,960 in drug costs.41 At that expenditure level, a “donut

hole” opens: beneficiaries are responsible for 45 percent of the cost of the drug

(in 2015) until their out-of-pocket hits $4,700, after which they pay 5 percent of

their drug costs.42

o Enrollees in MA-PDs generally have better coverage than do those who must buy

a Part D plan directly: fully 58 percent of MA-PD enrollees participate in plans

that have no Part D deductible.43 Such no-deductible drug plans are more

common in Medicare Advantage than in Part D plans available to traditional

Medicare enrollees.44 And, almost half (45 percent) of MA-PD enrollees are in

plans that close some of the “donut hole” in Part D’s drug coverage.45

Premium cost. The average enrollee in a MA-PD plan in 2015 pays a monthly plan

premium of about $38.46 Medicare Advantage plans may use savings to reduce—

sometimes to zero—the premiums they charge for coverage. In 2015, 78 percent of all

MA-PD enrollees had a choice of at least one plan that charged nothing for Medicare

Advantage coverage, leaving enrollees responsible only for their Part B premium.47

Almost one-half of all MA-PD enrollees participate in these “zero-premium” plans.48

Some plans go even further, and use their savings to reduce the Part B premium.49

Out-of-pocket limits. Medicare Advantage plans must limit out-of-pocket expenditures

for Part A and Part B services.50 The out-of-pocket limit in 2015 can be no greater than

$6,700 per Medicare Advantage enrollee annually. In fact, the average out-of-pocket

limit in 2015 is less: $5,041 per enrollee.51

Medicare Advantage plans are sold predominantly to individuals and less frequently to groups.52

Almost 64 percent of Medicare Advantage enrollees participate in a health maintenance

41 KFF June 2015 Issue Brief at 11. 42 Id. 43 Id. 44 Gretchen Jacobson, Anthony Damico, Tricia Neuman, and Marsha Gold, Kaiser Family Foundation Issue Brief,

Medicare Advantage 2015 Data Spotlight: Overview of Plan Changes, (Dec. 10, 2014), at 11, available at

http://files.kff.org/attachment/data-spotlight-medicare-advantage-2015-data-spotlight-overview-of-plan-changes 45 KFF June 2015 Issue Brief at 11. 46 KFF June 2015 Issue Brief at 8. 47 Id. at 8. 48 Id. 49 Medicare Payment Advisory Commission (“MedPAC”), Report to the Congress: Medicare Payment Policy,

(March 2015), Ch. 13, available at www.medpac.gov/documents/reports/chapter-13-the-medicare-advantage-

program-status-report-(march-2015-report).pdf?sfvrsn=0 . 50 Id. 51 KFF June 2015 Issue Brief at 10. 52 According to MedPAC, as of February 2015, about 3 million enrollees were in employer group plans, or about 19

percent of all Medicare Advantage enrollees. About 2 million were in special needs plans. MedPAC, A Data Book,

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September 1, 2015

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organization (HMO).53 Preferred provider organizations (PPOs) provide coverage to 31 percent

of the enrollees. Just 5 percent of all Medicare Advantage enrollees obtain services through

private fee-for-service plans,54 and that proportion has “fallen precipitously” since 2008.55

Consistent with the usual way in which HMOs and PPOs operate, enrollees in these plans usually

obtain care from a more limited network than offered by traditional Medicare, and these plans

(and in particular, the HMOs) typically manage the care provided.56

b. Changes To The Medicare Advantage Program Made By The ACA

An insurer wishing to offer a Medicare Advantage plan in a county must submit a bid to the

Centers for Medicare & Medicaid Services (CMS). The bid covers the insurer’s projected cost to

provide required Medicare benefits under Part A and Part B to a beneficiary. CMS compares the

bid (plus an amount for profit) to a local payment benchmark intended to reflect, in part, the cost

of providing care through the traditional Medicare system.57 Through 2011, Medicare retained 25

percent of the amount (if any) by which the benchmark exceeded the bid.58 The balance (75

percent) was rebated to the bidder and used to provide supplemental benefits or lower premiums

(including Part B premiums).59 The Department has recognized that this structure “encourages

insurers to compete against each other to attract Medicare beneficiaries by providing low prices

and more benefits.”60

Before the ACA, Medicare Advantage plans were being paid, on average, 114 percent of

Medicare fee-for-service costs per enrollee.61 The ACA seeks to change this structure so as to

reduce, if not entirely eliminate, the payment difference per enrollee. The ACA does this in two

ways: first, it gradually reduces the benchmarks. Second, it reduces the amount rebated from 75

percent of the difference between a bid and the benchmark to an amount ranging from 50 percent

to 70 percent (depending on plan quality).62

Health Care Spending and the Medicare Program, Ch. 9 (June 2015) available at

www.medpac.gov/documents/data-book/jun15databooksec9.pdf?sfvrsn=0. 53 In 2015, 64 percent (10.7 million) of the 16.8 million Medicare Advantage enrollees were in HMO plans. KFF

June 2015 Issue Brief at 3. 54 Id. Most of the PPO enrollees (4 million) participate in local (i.e., countywide) PPOs; a much smaller number

(1.2 million) enrollees participate in regional PPOs. Id. 55 Id. 56 MedPAC, Report to the Congress, supra, Ch. 13, at 319. 57 See Competitive Impact Statement, United States v. Humana, supra, at 4. 58 Id. 59 Id. 60 See Competitive Impact Statement, United States v. UnitedHealth, supra, at 6; see also Competitive Impact

Statement, United States v. Humana, supra, at 4-5 (the rebate causes Medicare Advantage plans to “compete for

enrollment by lowering costs, lowering premiums, increasing benefits, and improving performance”). 61 This was the figure in 2009. See U.S. Department of Health and Human Services, Office of the Assistant

Secretary for Planning and Evaluation, The Medicare Advantage Program in 2014, (April 7, 2014) at 9, available at

http://aspe.hhs.gov/sites/default/files/pdf/76846/ib_MedicareAdvantage.pdf. 62 MedPAC, Medicare Advantage Program Payment (rev’d Oct. 2014), available at

www.medpac.gov/documents/payment-basics/medicare-advantage-program-payment-system-14.pdf?sfvrsn=0.

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Not surprisingly, before the ACA took effect the Congressional Budget Office (CBO) projected

that these changes would reduce enrollment.63 Those predictions were wrong: enrollment in

Medicare Advantage plans has increased, not decreased, since passage of the ACA. A table

included in a recent issue brief published by the Kaiser Family Foundation shows this:64

This enrollment increase has occurred at the same time that CMS has ratcheted down the

payments to Medicare Advantage plans from the average of 114 percent of the amount expended

per fee-for-service enrollee in 2009,65 to just 102 percent in 2015.66 And, while total Medicare

Advantage enrollment has been growing quickly, and is projected to continue to grow to 25

million over the next 10 years,67 the number of Medicare Advantage plans is declining.68

2. Medicare Advantage Constitutes A Separate Relevant Product Market

In each of the two recent cases in which the Department focused on the market for Medicare

Advantage plans, it identified Medicare Advantage plans sold to individuals as the relevant

product market. As the Department stated in the UnitedHealth/Sierra merger, Medicare

63 CBO estimated 35 percent less enrollment in 2019 than otherwise would have been the case—about 4.8 million

fewer enrollees. See CBO, Comparison of Projected Enrollment in Medicare Advantage Plans and Subsidies for

Extra Benefits Not Covered by Medicare, at 2, available at www.cbo.gov/sites/default/files/111th-congress-2009-

2010/costestimate/macomparisons.pdf 64 KFF June 2015 Issue Brief at 2 (Fig. 1). 65 Kaiser Family Foundation, The Role of Medicare Advantage, Slide 4 (Ex. 3), available in

http://kff.org/slideshow/the-role-of-medicare-advantage/. 66 MedPAC, Report to the Congress: Medicare Payment Policy, at 325 (March 2015) available at

www.medpac.gov/documents/reports/chapter-13-the-medicare-advantage-program-status-report-(march-2015-

report).pdf?sfvrsn=0 (Table 13-4). 67 The Role of Medicare Advantage, supra, Slide 2 (Ex. 1). 68 Gretchen Jacobson, Tricia Neuman, and Anthony Damico, Kaiser Family Foundation Issue Brief, What’s In and

What’s Out? Medicare Advantage Market Entries and Exits for 2015 (Oct. 23, 2014) at 2, available at

http://files.kff.org/attachment/medicare-advantage-market-entries-and-exits-for-2015-issue-brief/.

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Advantage plans “offer lower co-payments, lower co-insurance, caps on total yearly out-of-

pocket spending, prescription drug coverage, vision coverage, health club memberships, and

other benefits that traditional Medicare does not cover.”69 Similarly, in the Humana/Arcadian

merger, the Department found Medicare Advantage plans:

Offer substantially richer benefits at lower costs to enrollees than

traditional Medicare does with or without a Medicare Supplement

or Medicare prescription drug plan, including lower copayments,

lower coinsurance, caps on total yearly out-of-pocket costs,

prescription drug coverage, and supplemental benefits that

traditional Medicare does not cover, such as dental and vision

coverage, and health club memberships.70

The fact that Medicare Advantage plans combine in one product benefits that an enrollee in

traditional Medicare must assemble from a variety of sources is yet another significant feature

that distinguishes these plans from traditional Medicare. As the Department observed in the

Humana/Arcadian merger, “Seniors enrolled in Medicare Advantage plans also often value that

they can receive all of these benefits through a single plan and that Medicare Advantage plans

manage care in ways that traditional Medicare does not.”71 One-stop shopping is of real value in

many markets,72 but particularly here, where consumers are older, the products they must

compare differ widely, and pricing comparisons are extremely difficult, not least because

consumers frequently do not know what services they will require in the year ahead.73 The cap

on financial risk similarly distinguishes Medicare Advantage products from traditional Medicare.

The sum of these features translates into a strong preference by many seniors for Medicare

Advantage plans. As the Department concluded in the UnitedHealth/Sierra merger:

Due in large part to the lower out-of-pocket costs and richer

benefits that many Medicare Advantage plans offer seniors over

traditional Medicare, seniors in the Las Vegas area would not

likely switch away from Medicare Advantage plans to traditional

69 Competitive Impact Statement, United States v. UnitedHealth, supra, at 7; see also Competitive Impact

Statement, United States v. Humana, supra, at 4. 70 Competitive Impact Statement, United States v. Humana, supra, at 5. 71 Id. 72 See ABA Section of Antitrust Law, Antitrust Law Developments (7th ed. 2012) at 595-99 (broad recognition of

cluster markets in industries including hospital services, financial services, office supply superstores, and others). 73 See generally Gretchen Jacobson, Christina Swoope, Michael Perry, Mary Slosar, How are seniors choosing and

changing health insurance plans?, Henry J. Kaiser Family Foundation (May 2014) at 12 (“Seniors say they have

tried to compare the costs, coverage, and provider networks of plans, but find it frustrating and confusing”),

available at https://kaiserfamilyfoundation.files.wordpress.com/2014/05/8589-how-are-seniors-choosing-and-

changing-health-insurance-plans.pdf.

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Medicare in sufficient numbers to make an anticompetitive price

increase or reduction in quality unprofitable.74

Based on the same differentiating factors, the Department similarly concluded in the

Humana/Arcadian merger that individual Medicare Advantage plans constituted a relevant

product market.75

Despite the changes to the Medicare Advantage program made by the ACA, the elements that

supported the Department’s conclusions in 2008 and 2012 that Medicare Advantage plans

constitute a distinct relevant product market still are in place today: Medicare Advantage plans

continue to offer richer benefits at lower costs than does traditional Medicare, even when the

latter is supplemented by Medigap policies and Part D plans.76 Moreover, the ACA did nothing

to reduce the complexity that faces a senior as he or she attempts to weave together coverage for

inpatient care, outpatient care, physician care, prescription drugs, vision care, dental care, and

other necessary health care, from the various items on the traditional Medicare menu including

Part A, Part B, Part D, and Medigap and other supplemental insurance policies. To further

complicate matters, seniors simultaneously must attempt to select coverage in a way that does

not leave the senior exposed to large deductibles, high coinsurance on Part B, and no out-of-

pocket limits for those unfortunate enough to incur substantial heath care expenses in a given

year.

Not only has passage of the ACA not weakened the argument that Medicare Advantage plans

constitute a separate relevant product market, subsequent events have strengthened the argument.

As noted above, costs for the average Medicare Advantage enrollee are being brought in line

with costs for the average traditional Medicare enrollee. The CBO predicted that with fewer

dollars available, relative to traditional Medicare, Medicare Advantage plans could expect

enrollment to decline as seniors opted out of Medicare Advantage and into traditional

Medicare.77 But as this differential has narrowed, enrollment—instead of declining—has

grown.78

It appears the vast majority of individuals enrolled in Medicare Advantage plans have stayed in

Medicare Advantage plans, even as the dollars expended on them relative to expenditures on

74 Competitive Impact Statement, United States v. UnitedHealth, supra, at 4-5. 75 Competitive Impact Statement, United States v. Humana, supra, at 6 (“a small but significant increase in

Medicare Advantage plan premiums or reduction in benefits is unlikely to cause a sufficient number of seniors in the

relevant geographic markets to switch to traditional Medicare such that the price increase or reduction in benefits

would be unprofitable”). 76 See generally KFF June 2015 Issue Brief at 8-12. 77 CBO, Comparison of Projected Enrollment in Medicare Advantage Plans and Subsidies; see generally KFF June

2015 Issue Brief at 1; Gretchen A. Jacobson, Patricia Neuman, Anthony Damico, At Least Half Of New Medicare

Advantage Enrollees Had Switched From Traditional Medicare During 2006–11, 34 Health Affairs 48, 49 (Jan.

2015), available at http://content.healthaffairs.org/content/34/1/48.full.pdf. 78 Id.

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traditional Medicare beneficiaries have declined by about 10 percent.79 One study confirmed that

in any given year the odds of seniors switching between Medicare Advantage and traditional

Medicare are small (and fewer switch from Medicare Advantage to the traditional program than

vice versa).80 Significantly, seniors are far less likely to switch from Medicare Advantage to

traditional Medicare when other Medicare Advantage alternatives are available.81 “And the odds

of switching from Medicare Advantage to traditional Medicare were higher in counties with

fewer plans, less experienced plans, or lower Medicare Advantage penetration rates.”82

These data suggest strongly that Medicare Advantage enrollees prefer a Medicare Advantage

product to traditional Medicare. So long as other Medicare Advantage alternatives are available,

they generally do not switch to traditional Medicare. Similarly, in each of the

UnitedHealth/Sierra and Humana/Arcadian mergers, the Department found Medicare Advantage

constitutes a relevant product market separate from traditional Medicare because seniors would

not switch away from Medicare Advantage to traditional Medicare in sufficient numbers to

defeat a small but significant price increase or quality decrease in Medicare Advantage.83 The

same is true today. The only difference is that the evidence that such switching will not occur is

far stronger now than it was in 2008 or 2012.

B. Relevant Geographic Market

Consistent with the Department’s practice in the UnitedHealth/Sierra84 and Humana/Arcadian85

mergers, the relevant geographic markets in which to evaluate the proposed Aetna/Humana

merger are at the county (or parish) level. CMS approves Medicare Advantage plans on a

county-by-county basis,86 and the vast majority of seniors may only enroll in a Medicare

Advantage plan in the county in which they live.87

79 As discussed earlier, in 2009, on average, the government expended 14 percent more on Medicare Advantage

enrollees than it did on traditional Medicare beneficiaries. By 2015, that average had shrunk to 102 percent – a

reduction in the differential of 10.5 percent. 80 Gretchen A. Jacobson, Patricia Neuman, Anthony Damico, At Least Half Of New Medicare Advantage Enrollees

Had Switched From Traditional Medicare During 2006–11, 34 Health Affairs 48, 51 (Jan. 2015), available at

http://content.healthaffairs.org/content/34/1/48.full.pdf. 81 Id. at 53. 82 Id. 83 Competitive Impact Statement, United States v. UnitedHealth, supra, at 7; Competitive Impact Statement, United

States v. Humana, supra, at 6. 84 Competitive Impact Statement, United States v. UnitedHealth, supra, at 6. 85 Competitive Impact Statement, United States v. Humana, supra, at 7. 86 CMS examines network adequacy on a county-by-county basis. See “CY2015 MA HSD Provider and Facility

Specialties and Network Adequacy Criteria Guidance,” available at www.cms.gov/Medicare/Medicare-

Advantage/MedicareAdvantageApps/Downloads/CY2015_MA_HSD_Network_Criteria_Guidance.pdf 87 Almost 88 percent of all Medicare Advantage enrollment is in HMOs and local PPOs. See KFF June 2015 Issue

Brief at 3. Seniors enroll in these at the county level. Regional PPOs (just 7 percent of all enrollment) may provide

coverage on a regional basis, but their beneficiaries can enroll in a plan only in the service area in which they live.

CMS, Medicare Managed Care Manual, Ch. 2, Medicare Advantage Enrollment and Disenrollment, § 20.2,

www.cms.gov/Medicare/Health-Plans/HealthPlansGenInfo/downloads/mc86c02.pdf .

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C. Competitive Effects

Under the Merger Guidelines, a “highly concentrated market” is one where the Herfindahl-

Hirschman Index (HHI) is 2500 or more.88 “Mergers resulting in highly concentrated markets

that involve an increase in the HHI of between 100 points and 200 points potentially raise

significant competitive concerns and often warrant scrutiny. Mergers resulting in highly

concentrated markets that involve an increase in the HHI of more than 200 points will be

presumed to be likely to enhance market power.”89 Consistent with this approach, our analysis

identifies counties where (1) both Aetna and Humana have Medicare Advantage membership,

(2) the post-merger HHI is at least 2,500, and (3) the merger produces an increase of at least 100

points.

The table below shows the substantial impact the Aetna acquisition of Humana would have on

Medicare Advantage competition across the nation.90 In 1,083 markets, the transaction would

increase the HHI by at least 100 points and the post-merger HHI will top 2,500. In 924 of these

markets, the transaction would increase the HHI by more than 200 points.

Table 1. Counties in which the Post-Merger HHI Exceeds 2,500

and Change in HHI Exceeds 100 for Medicare Advantage Lives

HHI Delta Screen

>200 >100

Number of Counties 924 1,083

Aetna Membership 784,167 842,864

Humana Membership 1,612,941 1,878,082

Total Aetna/Humana

membership

Membership to Divest

(smaller plan)

2,397,108

581,050

2,720,946

610,278

Source: Centers for Medicare & Medicaid Services, June 2015 MA Enrollment by Contract/Plan/State/County.91

88 Horizontal Merger Guidelines, U.S. Department of Justice and Federal Trade Commission (August 19, 2010) at §

5.3, available at www.justice.gov/atr/horizontal-merger-guidelines-08192010. 89 Id. 90 We exclude Special Needs Plans, as the Department did in both UnitedHealth/Sierra and Humana/Arcadian. 91 Available at www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-

Reports/MCRAdvPartDEnrolData/Monthly-Enrollment-by-Contract-Plan-State-County-Items/Monthly-Enrollment-

by-CPSC-2015-06.html.

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Aetna and Humana today provide health care coverage through Medicare Advantage for more

than 4.3 million people.92 More than 2.7 million of these seniors—almost two-thirds of both

companies’ enrollees—live in relevant geographic markets that are or will be highly

concentrated and in which the HHI increase will be at least 100 points. The proposed

acquisition threatens serious and widespread competitive harm.

The deal will not just eliminate current competition between Humana and Aetna, it will eliminate

future competition between them. Humana is the second largest insurer of Medicare Advantage

lives in the country.93 Aetna is the fourth largest.94 Aetna has promised investors it will continue

to grow its Medicare Advantage business, as this chart from an Aetna investor conference held in

December 2014 makes clear:95

The merger would eliminate the possibility of competition between Aetna and Humana in

markets which Aetna plans to enter. The Department should study carefully Aetna’s (and

Humana’s) expansion plans to determine the degree to which both current and future competition

will be sacrificed should this deal be completed.

92 CMS, June 2015 MA Enrollment by Contract/Plan/State/County, available at www.cms.gov/Research-Statistics-

Data-and-Systems/Statistics-Trends-and-Reports/MCRAdvPartDEnrolData/Monthly-Enrollment-by-Contract-Plan-

State-County-Items/Monthly-Enrollment-by-CPSC-2015-06.html. 93 Anna Wilde Mathews, Liz Hoffman, Dana Mattioli, With Merger Deal, Aetna, Humana Get Ahead of the Pack,

Wall Street Journal (July 6, 2015), available at www.wsj.com/articles/with-merger-deal-aetna-humana-get-ahead-

of-the-pack-1436143581 94 KFF June 2015 Issue Brief at Fig. 14. (The BCBS figure shown there adds together shares for the different Blue

Cross and Blue Shield affiliates in the U.S.) 95 Aetna, 2014 Investor Conference (Dec. 11., 2014), at slide 72 available at http://phx.corporate-

ir.net/External.File?item=UGFyZW50SUQ9NTYzNTQ0fENoaWxkSUQ9MjYzODg0fFR5cGU9MQ==&t=1; see

also Aetna, 2013 Investor Conference (Dec. 12., 2013) at slide 107 (“Medicare Has Been a Growth Driver for

Aetna”), available at www.aetna.com/investors-aetna/assets/documents/2013%20Investor%20Conference/2013-

Investor-Conference-Presentation.pdf.

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D. Aetna/Humana Will Not Show Efficiencies Overcome The Merger’s Anticompetitive

Effects

1. The Aggregation of Buyer Power Is Not An Efficiency And Will Harm Seniors

Aetna and Humana may argue that by merging they will obtain market power with which they

can force hospitals and physicians to further lower their prices to the benefit of consumers.96

The argument lacks merit.

Courts and commentators distinguish between monopsony power and countervailing power.97

Monopsony power is the mirror image of monopoly power: a single buyer has monopsony power

when it faces off against competitive suppliers who lack market power.98 (And a small group of

buyers in the same situation have oligopsoly power.)99 A monopsonist maximizes profits by

depressing prices below competitive levels. Suppliers react by reducing output. As the

Department recognized in a prior acquisition by Aetna, the exercise of monopsony power by an

insurer harms consumers because it depresses the supply of providers (and potentially of other

health care resources) below competitive levels.100 Countervailing power is the use of buyer

power against a supplier with market power. Some argue countervailing power may cause a

supplier with market power to lower its price closer to the competitive level.101 But, as one law

professor who has written extensively on buyer power notes, “the exercise of countervailing

power is not always procompetitive.”102 As this commentator points out:

[A] merger that is large enough to increase buyer power materially

may harm competition in multiple ways. First, it may create

monopsony power and enable the merged firm to exploit small,

relatively powerless providers. Second, the merger may create

downstream market power, which could offset the desirable effects

of countervailing power and raise premiums to consumers. Finally,

96 Several commentators have made this argument. See, e.g., Victor Fuchs, Peter Lee, A Health Side of Insurer

Mega-Mergers, Wall Street Journal (Aug. 26, 2015), available at www.wsj.com/articles/a-healthy-side-of-insurer-

mega-mergers-1440628597. Whether Aetna would make this argument is less clear: the company’s CEO is on

record saying so long as a market evolves toward capitation and away from fee-for-service, “a [provider] monopoly

or oligopoly in a marketplace is a good thing.” Aetna, 2014 Investor Conference (Dec. 11, 2014) (statement made on

audio portion at slide 35) available at http://edge.media-server.com/m/p/eebugf92/lan/en. 97 See, e.g., John B. Kirkwood, Powerful Buyers and Merger Enforcement, 92 B.U. L. REV. 1485, 1493-1512 (2012). 98 See Improving Health Care: A Dose of Competition, Department of Justice & Federal Trade Commission,

Improving Health Care: A Dose of Competition 29 (July 2004), Ch. 6 at 13, available at

www.justice.gov/sites/default/files/atr/legacy/2006/04/27/204694.pdf. 99 Id. at n.84. 100 Complaint, United States v. Aetna Inc. and The Prudential Insurance Co., No. 3-99CV 1398-H, at ¶¶ 30-33 (June

21, 1999), Competitive Impact Statement at 9-12 (July 16, 1999), available at www.justice.gov/atr/case/us-v-aetna-

and-prudential-insurance-company; see also United States v. UnitedHealth Group, Inc., and PacifiCare Health

Systems, Inc., Civil Action No. 1:05CV02436, Complaint ¶ 5 (Dec. 20, 2005, D.D.C. 2005), available at

http://www.justice.gov/atr/case/us-v-unitedhealth-group-inc-and-pacificare-health-systems-inc. 101 Dose of Competition, Ch. 6 at 14, n.86. 102 John B. Kirkwood, Buyer Power and Healthcare Prices, Wash. L. Rev. (forthcoming) at 10 n.32.

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September 1, 2015

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the merger might create countervailing power but the merged firm

might exercise it in anticompetitive ways, harming consumers or

small providers. Because a merger of large insurance companies

is likely to produce at least one of these anticompetitive

outcomes, allowing major insurers to combine does not appear to

be a promising way of lowering healthcare prices.103

This conclusion simply reinforces the wisdom of the position taken by the antitrust enforcement

agencies a decade ago, when they published their seminal study on competition in health care:

“Countervailing power should not be considered an effective response to disparities in

bargaining power between payors and providers.”104

2. Entry

As observed in our analysis of the Anthem/Cigna merger, any argument that entry is sufficient to

overcome the otherwise anticompetitive effects of a health insurer merger should be considered

(in the words of a former Acting Assistant Attorney General in charge of the Division) “carefully

and with some skepticism.”105

The Department recognized in the Michigan MFN case that effective entry into a commercial

health insurance market requires that “a health insurer contract with broad provider networks and

obtain hospital prices and discounts at least comparable to the market’s leading incumbents.”106

The same applies to an insurer seeking to enter a Medicare Advantage market. In fact, even if the

103 Id. at 7-8 (emphasis added and footnotes omitted). 104 Dose of Competition, Executive Summary at 27 (8th Observation). Although this was discussed primarily in the

context of provider pleas that they be allowed to exercise countervailing power in negotiations with insurers, the

logic applies equally against an assertion by insurers that they be allowed to merge to obtain power to use against

providers. In fact, the enforcement agencies have responded to the argument that providers ought to have

countervailing power to offset situations where insurers gain monopsony power by asserting “antitrust enforcement

to prevent the unlawful acquisition … of monopsony power by insurers is a better solution than allowing providers

to exercise countervailing power.” Id. Ch. 3 at 21. 105 Pozen at 7. See also remarks of Christine Varney, then Assistant Attorney General of the DOJ’s Antitrust

Division, at a joint American Bar Association/American Health Lawyers Association

Antitrust in Healthcare Conference, (May 24, 2010), available at http://www.justice.gov/atr/speech/antitrust-and-

healthcare. 106 Complaint, U.S. v. Blue Cross and Blue Shield of Michigan, No. 2:10-cv-14155-DPH-MKM (Oct. 18, 2010) at ¶

35, available at www.justice.gov/atr/case/us-and-state-michigan-v-blue-cross-blue-shield-michigan. The

Department also noted that entry was difficult (in fact, efforts to enter were demonstrably unsuccessful) in the

complaint filed against a payer and five hospitals for colluding to lessen competition in the health insurance market

in Montana. U.S. and State of Montana v. Blue Cross and Blue Shield of Montana, et. al., Case No.1:11-cv-00123-

RFC (Nov. 8, 2011), available at www.justice.gov/atr/case/us-and-state-montana-v-blue-cross-blue-shield-montana-

inc-et-al. See also United States v. Aetna Inc. and Prudential Insurance Co. of Am., Complaint at ¶ 23 (finding that it

was unlikely that new companies would enter or that existing insurers providing other products would shift

resources to provide products competitive with the newly formed Aetna/Prudential in Houston and Dallas “because

of the costs and difficulties of doing so”).

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insurer already has a commercial product in the same relevant geographic market, entering the

Medicare Advantage market may present some challenges.

In the Analysis to Aid Public Comment filed in the Humana/Arcadian merger, the Department

took note that competition from existing Medicare Advantage plans and new entrants “is

unlikely to prevent anticompetitive effects in each relevant geographic market. Entrants face

substantial cost, reputation, and distribution disadvantages that will likely make them unable to

prevent Humana from profitably raising premiums or reducing benefits in the relevant

geographic markets.”107 The very same allegation was made earlier in the UnitedHealth/Sierra

merger.108

E. Remedies

Aetna and Humana may argue that divestitures will remedy the competitive problems identified

by the Department. Both the UnitedHealth/Sierra and Humana/Arcadian mergers were permitted

to proceed on condition that the parties divest portions of their individual Medicare Advantage

lines of business. In those cases, however, the mergers threatened competitive harm in only a few

relevant geographic markets. UnitedHealth’s proposed acquisition of Sierra affected Medicare

Advantage patients in just two counties. In the Humana/Arcadian transaction, the Department

identified 45 counties in which the merger would lessen competition, affecting approximately

50,000 Medicare Advantage enrollees. Here, by contrast, the proposed transaction between

Aetna and Humana would substantially lessen competition in 1,083 counties with over 2.7

million Aetna and Humana members. (See Table 1.)

Even if it were feasible, it would be a staggering task to develop, implement and supervise a

divestiture package that would remedy harm to competition over such a broad area. Our analysis

shows the 1,083 affected counties are in 38 states.

The Department has never before been faced with a merger that threatens to destroy competition

in the Medicare Advantage market to the extent promised by this transaction. The scope of the

likely competitive harm here is so broad and so deep that the amount of divestitures required to

preserve and grow competition may not be feasible from a practical standpoint or even preserve

the purported business benefits of the transaction.109

107 Competitive Impact Statement, United States v. Humana, at 8. 108 Competitive Impact Statement, United States v. UnitedHealth, at 8-9. 109 The federal antitrust enforcement agencies have opposed mergers where the divestitures that might otherwise

have been required to preserve competition were so numerous as to cast serious doubt on the use of divestitures as a

remedy. See, e.g., FTC v. Sysco Corp., No. 15-cv-256-APM, 2015 U.S. Dist. LEXIS 83482, at *76–78 (D.D.C. June

23, 2015); United States v. AT&T Inc. and T-Mobile, Case: 1:11-cv-01560 (D.D.C. Aug. 31, 2011), available at

www.justice.gov/atr/case/us-and-plaintiff-states-v-att-inc-et-al; Press Release, Department of Justice, Blue Cross

Blue Shield of Michigan and Physicians Health Plan of MidMichigan Abandon Merger Plans: Decision to Abandon

Deal Follows Justice Department’s Decision to Challenge the Acquisition (Mar. 8, 2010).

www.justice.gov/opa/pr/blue-cross-blue-shield-michigan-and-physicians-healthplan-mid-michigan-abandon-

merger-plans.

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September 1, 2015

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3. Conclusion

The proposed Aetna/Humana merger threatens substantial and irreversible harm to competition

in critically important markets for Medicare Advantage plans across the country. In the earlier

acquisition of Arcadian by Humana, the Department recognized that Medicare Advantage

insurers “compete against each other by offering plans with frequently low or no premiums,

reducing copayments, eliminating deductibles, lowering annual out-of-pocket maximum costs,

managing care, improving drug coverage, offering desirable benefits, and making their provider

networks more attractive to potential members.”110 The Department warned that if the merger

proposed there were completed, the loss of “competition likely would result in higher premiums

and reduced benefits for seniors enrolled in Medicare Advantage plans in the relevant geographic

markets.”111

The same consequences would follow here if Aetna and Humana are permitted to close the

transaction. Today, however, unlike the “thousands of seniors” who would have been affected

had the Department not intervened in the Humana/Arcadian merger,112 millions of seniors will be

adversely affected should the Aetna/Humana merger proceed as proposed.

110 Competitive Impact Statement, United States v. Humana, at 8. 111 Id. 112 Complaint, United States v. Humana at ¶ 4.

By Email and Courier

August 5, 2015

The Honorable William Baer

Assistant Attorney General

United States Department of Justice Antitrust Division

950 Pennsylvania Avenue, N.W.

Washington, D.C., 20530

Dear Assistant Attorney General Baer:

I am writing on behalf of the nearly 5,000 member hospitals, health systems and other health

care organizations, and 43,000 individual members of the American Hospital Association (AHA)

regarding the proposed acquisitions involving four of the five major commercial health insurance

companies in the United States: Anthem’s proposed acquisition of Cigna and Aetna’s proposed

acquisition of Humana. Because the size and scope of these proposed acquisitions is so

enormous and their potential anticompetitive impact on access, affordability and innovation is so

profound, we will address them in separate letters in the knowledge that the Antitrust Division of

the Department of Justice (Department) has indicated it will likely consider them collectively.

This letter will focus on the proposed Anthem/Cigna deal.

We endorse the Department’s often stated position that reforms in the health insurance industry

are dependent on vigorous antitrust enforcement, particularly those involving significant

commercial insurers where there is the very real potential for those deals to substantially reduce

competition and substantially diminish the insurers’ willingness to be innovative partners with

providers and consumers in transforming care. We believe the announced deals cited above have

that potential and, therefore, merit the closest scrutiny to determine whether remedies, such as

divestitures, have any chance of ameliorating the enduring damage they could do as a result of

the loss of such significant competition.

While some are comparing these acquisitions to those in the hospital sector, we submit that the

antitrust issues for these transactions are fundamentally different. The size, scope and enduring

impact of the announced deals far surpass any hospital merger. These transactions will combine

four of the five national health insurance companies, with effectively no possibility that existing firms could replicate their size and scope. As the Department has long recognized,

there are substantial barriers to entry in the health insurance sector (United States and the State of

The Honorable William Baer

August 5, 2015

Page 2 of 13

Michigan v. Blue Cross Blue Shield of Michigan and Remarks by Sharis A. Pozen on

Competition and Health Care: A Prescription for High-Quality Affordable Care, March 19,

2012). Moreover, the seeming underlying business case for them – increasing “top-line”

revenues and profits through acquisition rather than competition without offsetting demonstrable

efficiencies – is fundamentally different than that for transactions in the hospital sector. The

hospital sector is undergoing profound structural changes, driven by the need to take on risk as

the field moves away from fee-for-service payments toward population health, offer integrated

clinical care, and provide financially failing facilities with the resources they require to survive

and continue to serve their communities. Yet despite those pressures, the growth in hospital

spending is at historic lows, which is entirely inconsistent with claims from commercial insurers

about the impact of hospital transactions (Bureau of Labor Statistics Producer Price Index data,

2014-2015, for Hospitals (622)).

The attached analysis details the competitive issues that the Department will consider as it

reviews these deals and the precedents that suggest both are, and should be, at risk. Regulations

in the Affordable Care Act, such as the Medical Loss Ratio (MLR), do not warrant scaled-back

application of the antitrust laws. A keystone component of that act is competition, and the MLR

requirements do nothing to prevent the combined firms from increasing prices or reducing

competition in service, quality, plan design and the like.

We look forward to working with the Department throughout its investigation of these insurance

deals. To that end, we will be contacting the Department to request meetings with staff and top

officials to more fully discuss our concerns and ways in which we can be of assistance.

For more information, you can contact me directly at mhatton@aha.org or (202) 626-2336.

Sincerely,

/s/

Melinda Reid Hatton

Senior Vice President & General Counsel

Attachment

The Honorable William Baer

August 5, 2015

Page 3 of 13

Detailed Analysis of the American Hospital Association

On behalf of the nearly 5,000 members of the American Hospital Association (AHA), we

urge that the Antitrust Division of the Department of Justice (Department) thoroughly investigate

Anthem, Inc.’s (Anthem) planned $54 billion acquisition of Cigna Corporation. There is a

material risk that the transaction is likely to substantially reduce competition, in violation of

Section 7 of the Clayton Act.1 The potential harm to consumers from this loss of competition is

large and durable. Because the two companies generate more than $100 billion in combined

revenues, even a modest price increase would cost consumers billions of dollars in higher health

care costs.

The geographic breadth of the transaction’s potential anticompetitive effects and the

number of consumers at risk are also sweeping. The transaction threatens to reduce competition

in the sale of commercial health insurance in at least 817 relevant geographic markets, defined as

Metropolitan Statistical Areas (MSAs) or rural counties. In 600 of these markets, the transaction

would result in a Herfindahl-Hirschman Index (HHI) in excess of 2,500 and a greater than 200-

point HHI increase, which under the Department’s and the Federal Trade Commission’s (FTC)

Horizontal Merger Guidelines (Merger Guidelines, or Guidelines) are market concentration

levels and increases that the Department “presume[s] to be likely to enhance market power.”2 In

an additional 217 markets, the transaction would result in a post-merger HHI in excess of 2,500

and a 100-200 point HHI increase, which the Guidelines say “potentially raise[s] significant

competitive concerns.”3 In these 817 at-risk markets the parties collectively serve 45 million

consumers.

The risk of harm to these tens of millions of consumers is further enhanced because new

entry is unlikely to prevent, or even partially offset, the transaction’s potential anticompetitive

effects. The Department has repeatedly stated in its court filings and in statements by the

Department’s leadership that there are substantial barriers to entry in the health insurance sector,

including obtaining the necessary scale to form a full-service, cost-competitive provider network.

As former Acting Assistant Attorney General Sharis Pozen explained, the Department

“undertook an extensive review of entry and expansion in the health insurance industry” in 2011,

and found that entry in the health insurance sector was often difficult, particularly in already

concentrated markets, as is the case in many of the markets at issue here.4

The parties will no doubt argue that the transaction would produce offsetting efficiencies,

but this is not likely. And it is even less likely that the combined companies would “pass

through” any cost savings to consumers. As numerous economists have found, demand for health

1 15 U.S.C. § 18. 2 Merger Guidelines § 5.3. 3 Id. 4 Sharis A. Pozen, Acting Assistant Att’y Gen., Dep’t of Justice Antitrust Div., Competition and Health Care:

A Prescription for High-Quality, Affordable Care 7 (Mar. 19, 2012) [hereinafter Pozen, Competition and Health

Care], available at http://www.justice.gov/atr/speech/competition-and-health-care-prescription-high-quality-

affordable-care.

The Honorable William Baer

August 5, 2015

Page 4 of 13

insurance is inelastic,5 which reduces the incentive for large health insurance companies to pass

through cost savings. The incentives to pass savings on to consumers are further reduced due to

the opaqueness of the insurance markets and the fact that costs and benefits are not fully

internalized by consumers.

Anthem and Cigna also will undoubtedly urge that the Department approve the merger

after the parties agree to divestitures. It is far from clear that the parties could ever put forth a

divestiture package that would reduce the transaction’s likely anticompetitive effects. First, the

Department has been rightly concerned that the acquirer of any divested lives be well-positioned

to compete effectively in the local area. An existing presence in the market can often facilitate

the success of a buyer. Accordingly, we have examined to what extent it is possible to eliminate

the potentially anticompetitive overlaps through sales to an existing competitor without causing

an increase in market concentration. Significantly, in the 817 at-risk markets, over half of the

lives that need to be divested reside across 368 MSAs and rural counties with no divestiture

possibility that is likely to preserve the pre-merger market structure.

Second, even if the parties somehow managed to maintain the structural status quo, the

Department also must require, as it has in its recent enforcement actions, Anthem and Cigna to

ensure that the buyers of any divested contracts have a provider network of comparable cost and

breadth to that of the parties.6 Indeed, the Department has repeatedly recognized that in order for

a health insurer to compete effectively, it must have a full-service, cost-competitive network of

hospitals, physicians, and other health care providers.7

Third, the Department also should view any remedy proposal carefully because,

regardless of the “fix” the parties ultimately propose, the transaction will inevitably eliminate a

national health insurance company. The parties are two of only five national health insurance

companies that remain today, and two of the other three (Aetna and Humana) also have entered

into a consolidation agreement. Recent enforcement actions suggest that all possible relevant

markets must be examined closely, particularly in a transaction of this magnitude, which can be

challenged on the basis of reduced competition in a market for national customers.8 In particular,

the Department should carefully investigate how this permanent loss of national competitors

would affect competition for contracts with national and large regional employers. Obvious

sources of evidence that the Department should analyze are the parties’ “bid” files reflecting

competition between them for these accounts.

5 See M. Kate Bundorf et al., Pricing and Welfare in Health Plan Choice 32 (Stanford Inst. for Economic

Policy Research Discussion Paper No. 07-47, 2008), http://www-siepr.stanford.edu/papers/pdf/07-47.pdf; Su Liu &

Deborah Chollet, Price and Income Elasticity of the Demand for Health Insurance and Health Care Services: A

Critical Review of the Literature ix (Mathematic Policy Research Ref. No. 6203-042, 2006), http://www.mathematica-

mpr.com/publications/pdfs/priceincome.pdf. 6 See Competitive Impact Statement at 17, United States v. Blue Cross-Blue Shield of Montana, No. 11-cv-

123-RFC (D. Mont. Nov. 8, 2011). 7 See id. 8 See FTC v. Sysco Corp., No. 15-cv-256-APM, 2015 U.S. Dist. LEXIS 83482, at *76–78 (D.D.C. June 23,

2015).

The Honorable William Baer

August 5, 2015

Page 5 of 13

Finally, while the competitive overlap between the parties appears somewhat smaller in

the sale of Medicare Advantage plans than in the commercial insurance market, the Department

also should investigate carefully the transaction’s effect on competition in the Medicare

Advantage sector. Starting with the Department’s challenge to UnitedHealthcare’s acquisition of

Sierra Health Services in 2008,9 the Department (working with the Center for Medicare &

Medicaid Services) has scrutinized carefully the effect of consolidation of Medicare Advantage

providers in order to preserve the benefits of competition for senior citizens that the program was

designed to bring. The Department should continue this policy of protecting competition for the

sale of Medicare Advantage plans both in its investigation of the Anthem/Cigna transaction, as

well in its investigation of Aetna’s proposed acquisition of Humana, which we will address in a

separate letter.

1. The Parties

A. Anthem

Anthem is one of the largest health insurance companies in the United States. In 2014,

Anthem generated approximately $73 billion in revenues.

Anthem is investor-owned and publicly-traded, and operates plans under the Blue Cross

(BCBS) brand in 14 states. The Anthem companies serve members as the Blue Cross licensee for

California, and as the Blue Cross and Blue Shield licensee for Colorado, Connecticut, Georgia,

Indiana, Kentucky, Maine, Missouri (excluding 30 counties in the Kansas City area), Nevada,

New Hampshire, New York (as the Blue Cross Blue Shield licensee in 10 New York City

metropolitan and surrounding counties and as the Blue Cross or Blue Cross Blue Shield licensee

in selected upstate counties), Ohio, Virginia (excluding the northern Virginia suburbs of

Washington, D.C.) and Wisconsin.

Anthem also conducts business through arrangements with other BCBS licensees in

South Carolina and Texas; and through its Amerigroup subsidiary in Florida, Georgia, Kansas,

Louisiana, Maryland, Nevada, New Jersey, New Mexico, New York, Tennessee, Texas and

Washington. The company is licensed to conduct insurance operations in all 50 states through its

subsidiaries.

Anthem has been strikingly successful on its own. In 2014, the company grew its

membership by 1.8 million new members, including more than 700,000 members from the

Public Exchanges, and surpassed 5 million members in its Medicaid business. In 2014 Anthem

increased its revenues by nearly $3 billion, or approximately 5 percent over the previous year.

Moreover, the company “made and [is] continuing to make substantial investments in new

capabilities that better serve [its] members and will help drive future growth [and it is] confident

that by remaining disciplined, consistent and accountable for delivering results, [it] will achieve

[its] goals.”10

9 See Complaint, United States v. UnitedHealth Group Inc., No. 08-cv-322 (D.D.C. Feb. 25, 2008). 10 Anthem, Inc., 2014 Annual Report 9 (2015).

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August 5, 2015

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Anthem reported 38.5 million members in its medical plans, as of June 30, 2015. Of

these, 5.8 million were in Medicaid plans, 1.4 million in Medicare Advantage, 1.6 million in

FEP, and 1.8 million in individual products. Approximately 29 million are commercial group

members.11

B. Cigna

Cigna also is one of the largest health insurance companies in the United States, with

15 million members in all 50 states. In 2014, Cigna generated approximately $35 billion in

revenues. Like Anthem, Cigna provides a wide range of commercial plans and has more than

14.2 million commercial members.12

Cigna also has been very successful on its own. Cigna’s 2014 Annual Report states that

in 2014 the company increased revenue by 8 percent and earnings per share by 9 percent last

year. And over the last five years, Cigna “delivered compound annual growth of 14 percent for

revenues and 14 percent for adjusted income from operations on a per share basis.”13 Moreover,

the 2014 Annual Report (which was issued months before the announcement of its transaction

with Anthem) states that, on its own, Cigna expected to achieve substantial growth, such as:

“Growing revenues by eight to ten percent in 2015;

Doubling the size of [its] business over the next seven to eight years[;] and

Delivering on [its] long-term Earnings Per Share objective of 10 to 13 percent compound

growth on an annual basis.”14

2. The Antitrust Laws Applied to Health Insurance Mergers

As noted in the 2004 report, Improving Health Care: A Dose of Competition, the federal

antitrust agencies, for decades, have had a bipartisan “commitment to vigorous competition on

both price and non-price parameters [ ] in health care.”15 As the Agencies have explained, in this

sector “[p]rice competition generally results in lower prices and, thus, broader access to health

care products and services. Non-price competition can promote higher quality and encourage

innovation.”16

11 Press Release, Anthem, Inc., Anthem Reports Second Quarter 2015 Results (July 29, 2015)

http://ir.antheminc.com/phoenix.zhtml?c=130104&p=irol-newsArticle&ID=2072061. 12 Press Release, Cigna Corp., Cigna Reports Strong Second Quarter 2015 Results, Affirms Increased Outlook

(July 30, 2015) http://newsroom.cigna.com/NewsReleases/Cigna-Reports-Strong-Second-Quarter-2015-Results--

Affirms-Increased-Outlook.htm. 13 Cigna Corp., 2014 Annual Report 3 (2015) (footnote omitted). 14 Id. 15 Dep’t of Justice & Federal Trade Comm’n, Improving Health Care: A Dose of Competition 29 (July 2004),

http://www.justice.gov/sites/default/files/atr/legacy/2006/04/27/204694.pdf. 16 Id. at 4.

The Honorable William Baer

August 5, 2015

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The Affordable Care Act (ACA) has not diminished the importance of antitrust

enforcement in the commercial health insurance sector. To the contrary, the Department’s

leadership has made clear that:

The success of health care reform will depend as much upon healthy competitive

markets as it will upon regulatory change. If health care reform is to produce

more efficient systems, bring health care costs under control, and provide higher-

quality health care delivery, then we must vigorously combat anticompetitive

mergers and conduct that harm consumers with responsible antitrust

enforcement.17

The Department has primary responsibility for enforcing the antitrust laws in the health

insurance sector.18 In this capacity, the Department has challenged transactions that cause a

significant increase in market concentration and loss of localized head-to-head competition.19 In

its enforcement actions, the Department has set forth a clear analytical framework for evaluating

transactions, which it should apply rigorously in reviewing this transaction of unprecedented size

and scope. We summarize that framework and then apply it to the Anthem/Cigna transaction to

demonstrate the substantial risk that the transaction presents to competition and consumers.

A. Relevant Product Market

The Department has consistently recognized that group commercial health insurance is a

well-defined antitrust-relevant product market. The Department has explained that, for

individuals who obtain commercial health insurance through their employers, there are no

reasonable competitive alternatives to group health insurance. This is because the closest

alternative—individual health insurance—is typically much more expensive than group health

insurance, in part because, while group health insurance is purchased using pre-tax dollars,

individual health insurance is not.20

The Department also has determined that individual (and relatedly, small group)

insurance is a relevant antitrust product market. As the Department has found, “individual health

insurance is the only product available to individuals without access to group coverage or

17 Pozen, Competition and Health Care at 19. 18 The FTC conducts the bulk of the antitrust investigations that involve hospitals. 19 See, e.g., Complaint, United States v. Humana Inc., 12-cv-464 (D.D.C., Mar. 27, 2012) (Medicare

Advantage); Complaint, United States v. Blue Cross Blue Shield of Montana, No. 11-cv-123-RFC (D. Mont. Nov. 8,

2011) (group commercial and individual insurance); Complaint, United States v. UnitedHealth Group Inc., No. 08-

cv-322 (D.D.C. Feb. 25, 2008) (Medicare Advantage); Complaint, United States v. UnitedHealth Group Inc., No.

05CV02436 (Dec. 20, 2005) (large group commercial insurance; small group commercial health insurance);

Complaint, United States v. Aetna, Inc., No. 99 CV 1398-H (June 21, 1999) (commercial plans.) These enforcement

actions reflect the Department’s experience in the insurance sector, including its understanding that, unlike many

industries, health insurance is characterized by strong and durable barriers to entry. See Complaint at ¶ 35, United

States v. Blue Cross Blue Shield of Michigan, No. 10-cv-14155-DPH-MKM (E.D. Mich. Oct. 18, 2010). 20 See Complaint at ¶¶ 21–24, Blue Cross Blue Shield of Montana.

The Honorable William Baer

August 5, 2015

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government programs that allows them [(1)] to reduce the financial risk of adverse health

conditions and [(2)] to have access to health care at the discounted prices negotiated by

commercial health insurers.” The Department has explained that “[t]here are no reasonable

alternatives to individual health insurance for individuals who lack access to group health

insurance” because “[p]urchasing hospital services directly, rather than through a commercial

insurer, is typically prohibitively expensive and [therefore] is not a viable substitute for group or

individual health insurance.”21

Regardless of how the Department ultimately defines the product market, the

Anthem/Cigna transaction is likely to reduce competition in the sale of commercial health

insurance. As shown above and discussed further below, the transaction would produce

substantial increases in concentration in the sale of commercial health insurance in substantial

portions of the country. Moreover, the transaction is likely to have particularly large and wide-

ranging anticompetitive effects in the sale of health insurance to employers who self-insure

because both parties are particularly strong in the sale of such plans.

B. Relevant Geographic Market

To date, the Department has largely defined local relevant geographic markets in the

health insurance sector. The rationale is that patients typically seek medical care close to their

homes or workplaces and consequently “strongly prefer health‐insurance plans with networks of

hospitals and physicians that are close to their homes and workplaces.”22 As a practical matter,

consumers will not select commercial health insurers that do not have a network of providers

close to where they work and live.23

The Department’s investigation of the Anthem/Cigna transaction should focus closely on

the deal’s impact on local markets throughout the country. However, as discussed below, this

transaction also raises substantial competitive concerns for reductions in competition for national

and large regional customers.

C. Competitive Effects

Consistent with modern antitrust enforcement principles, the Department’s competitive

effects analysis of health insurance transactions examines both market structure and direct

evidence of competition in the markets.

Market structure analysis focuses on the number of competitors, market shares, and

market concentration ratios, usually the HHI. The HHI is calculated by squaring the market share

of each firm competing in the market and then summing the resulting numbers. The Merger

Guidelines provide that a market whose HHI is above 2,500 is “Highly Concentrated.” The

21 Complaint at ¶¶ 22–23, Blue Cross Blue Shield of Michigan; see also Complaint at ¶¶ 25–26, Blue Cross

Blue Shield of Montana. 22 Complaint at ¶ 27, Blue Cross Blue Shield of Montana. 23 See id.at ¶¶ 27–29.

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August 5, 2015

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Guidelines further provide that “[m]ergers resulting in highly concentrated markets that involve

an increase in the HHI of more than 200 points will be presumed to be likely to enhance market

power.”24 Mergers resulting in highly concentrated markets that involve an increase in the HHI

of between 100 points and 200 points potentially raise significant competitive concerns and often

warrant scrutiny.25

The structural evidence strongly suggests that the Anthem/Cigna transaction will reduce

competition in many geographic markets. Table 1 depicts the substantial increases in

concentration that the transaction would produce.

Table 1

MSAs and Rural Counties in which the Post-Merger HHI Exceeds 2,500

for Commercial Lives

HHI Delta Screen Share Screen

>200 > 100 > 50% > 35%

All Commercial Lives

Number of MSAs 600 817 355 498

Total Commercially Insured

Population 31,231,334 45,034,730 11,325,952 23,692,558

Anthem Membership 10,472,094 12,405,109 5,723,016 9,747,303

Cigna Membership 3,706,219 4,755,399 1,254,867 2,613,582

Membership to Divest (smaller

plan) 2,942,351 3,721,670 1,191,751 2,288,825

Membership with no Potential

Acquirer 1,675,275 2,040,397 954,116 1,156,554

In 600 markets, the transaction will produce a post-merger HHI of more than 2,500 with

a 200-point increase, generating a presumption that the transaction will result in an increase in

the parties’ market power. Significantly, the parties insure approximately 31.2 million lives in

these markets. In 217 markets, covering an additional 14 million commercially insured

individuals, the transaction will produce a post-merger HHI of 2,500 with a 100-200 point

increase, indicating that the transaction raises significant competitive concerns for these

consumers.26

24 Merger Guidelines § 5.3. 25 See id. 26 The calculations are based on data from January 2015 obtained from HealthLeaders-Interstudy Managed

Market Surveyor, which provides information on the number of individuals who are enrolled in different health plan

products by county and plan. Following Department precedent in previous investigations, we have calculated shares

and HHI measures at the MSA level or, in the case of rural counties that are not part of an MSA, at the county level.

The Honorable William Baer

August 5, 2015

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The competitive picture is equally concerning if one focuses on market shares. In 355

markets, the combined company would have a market share of at least 50 percent, and in 498

MSAs and counties, their combined share would exceed 35 percent.27

Because the Department often focuses on the degree of head-to-head competition

between the merging parties, we also have examined the transaction’s effects on competition in

the sale of commercial health insurance to self-insured employers, which is the area of greatest

competitive overlap. The antitrust concerns are not lower for consolidations of health insurers

that sell policies to self-insured employers (often called Administrative Services Only plans, or

ASO). Again, an essential service that health insurers provide is access to a provider network at

competitive rates. Increasing the market power of a provider of self-insured products would

allow the carrier to increase the administrative and other service fees that self-insured employers

need to pay in order to obtain access to the carrier’s provider network and raises other

competitive concerns that negatively impact consumers.

As shown in Table 2, the competitive picture is even worse when one focuses on the sale

of commercial insurance to self-insured employers.

Table 2

MSAs and Rural Counties in which the Post-Merger HHI Exceeds 2,500

for Commercial ASO Lives

HHI Delta Screen Share Screen

>200 > 100 > 50% > 35%

Commercial ASO Lives

Number of MSAs 1,009 1,177 460 730

Total Commercially Insured

Population 38,336,781 43,919,746 14,928,252 24,741,274

Anthem Membership 10,915,580 11,314,078 6,818,499 9,275,512

Cigna Membership 6,385,014 6,960,004 2,450,874 4,265,669

Membership to Divest (smaller

plan) 4,358,445 4,679,006 2,053,778 3,247,357

Membership with no Potential

Acquirer 2,762,697 3,009,489 1,830,490 2,245,286

Limiting the analysis to self-insured lives, there are 1,009 MSAs and rural counties in

which the merger would result in an HHI exceeding 2,500 with an HHI increase of at least 200,

covering 38.3 million self-insured commercial lives who reside in these markets. And there are

1,177 local geographic areas, with nearly 44 million self-insured lives, for which the HHI

increase exceeds 100 (and the post-merger HHI is at least 2,500). In 460 of these markets, the

combined Anthem-Cigna share of self-insured commercial business would be at least 50 percent.

27 We also apply the HHI > 2500 threshold to these calculations.

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August 5, 2015

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D. Entry

The parties will no doubt argue that changes in the health care landscape would prompt

entry if they were to attempt to exercise market power. Former Acting Assistant Attorney

General Pozen appropriately cautioned that the Department should review such claims “carefully

and with some skepticism.”28 This is in part because smaller entrants and incumbents often lack

the volume to obtain prices from providers that are comparable to insurers with large market

positions. The Department’s challenge to Blue Cross Blue Shield of Michigan’s use of most-

favored nation clauses clearly set forth this market dynamic:

Blue Cross’ market power in each of the alleged markets is durable because entry

into the alleged [commercial health insurance] markets is difficult. Effective entry

into or expansion in commercial health insurance markets requires that a health

insurer contract with broad provider networks and obtain hospital prices and

discounts at least comparable to the market’s leading incumbents.29

Indeed, one of the central insights of antitrust analysis of the health insurance markets

over the last several decades is that Judge Easterbrook was likely incorrect at the time (and is

certainly incorrect today) in characterizing the key input of the health insurance market as

“capital” for spreading financial risk.30 Instead, as the Department has argued in its court filings,

“the core component of health insurance products today is access to a local network of health

care providers at rates far lower [than] those that an individual could negotiate directly.”31

Brand also is a substantial entry barrier in the commercial health insurance markets.

Because of the importance of health insurance, and the often substantial transition costs from

switching plans, employers and individuals are often very reluctant to switch to a company that

lacks an established brand in the relevant geographic market. Even companies with strong

positions in other regions can founder in markets in which they lack a strong track record of

providing high-quality services.32

28 Pozen, Competition and Health Care at 7. 29 Complaint at ¶ 35, United States v. Blue Cross Blue Shield of Michigan. 30 Ball Mem’l Hosp. v. Mut. Hosp. Ins. Inc., 784 F.2d 1325, 1335 (7th Cir. 1986) (affirming district court finding

“that insurers need only a license and capital, and that firms such as Aetna and Prudential have both[, and that] [t]here

are no barriers to entry”). 31 Plaintiff United States of America’s Memorandum In Opposition to Defendant Blue Cross Blue Shield of

Michigan’s Motion to Dismiss the Complaint With Prejudice at 13, United States v. Blue Cross Blue Shield of

Michigan, No. 10-cv-14155-DPH-MKM (E.D. Mich. Oct. 18, 2010). Moreover, the Tenth Circuit disagreed with Ball

Memorial and recognized the importance of Blue Cross of Kansas’s provider network, including direct contracts with

local hospitals, as a source of competitive advantage over other insurers that could not until recently contract directly.

Reazin v. Blue Cross and Blue Shield of Kansas, 899 F.2d 951, at 971–72 & n.32 (10th Cir. 1990). 32 See Pozen, Competition and Health Care at 7 (“brokers typically are reluctant to sell new health insurance

plans, even if those plans have substantially reduced premiums, unless the plan has strong brand recognition or a good

reputation in the geographic area where the broker operates.”)

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August 5, 2015

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E. Remedies

The parties also will no doubt propose to solve any overlaps that the Department views as

problematic through one-off divestiture remedies. The Department should view such remedies

with skepticism. Indeed, the Department has blocked outright health insurance transactions when

it doubted that a remedy could reliably fix the lost competition, as it did when Blue Cross Blue

Shield of Michigan attempted to purchase Physicians Health Plan of Mid-Michigan.33

Our analysis demonstrates that it will be, at best, challenging for Anthem and Cigna to

devise remedies that will maintain the competitive status quo. First, Table 1 provides estimates

of the number of lives that would need to be divested to maintain the current market structure.

Recognizing the Department’s concern that the acquirer of any divested lives be equipped to

compete effectively in the local area, without at the same time raising additional structural

concerns, we have identified those local areas in which there is no potential acquirer who

currently accounts for at least 5 percent of the covered lives and would not result in a post-

acquisition HHI of 2,500 with a change in HHI of at least 100. Based on these minimal criteria,

there is no viable divestiture candidate for approximately 55 percent of the lives to be divested

(or 2 million consumers), who reside across 368 MSAs and rural counties.

Second, even assuming that one could solve the “nominal” structural problem through the

divestitures, the Department must still ensure, as it has in the past, that the divesting parties

guarantee that the purchaser of any divested assets has a cost-competitive comparable network

of hospitals and physicians. As the Department explained in its Competitive Impact Statement

for its challenge to the Blue Cross-Blue Shield of Montana/New West transaction:

Most importantly, Sections IV(G)–(I) [of the Final Judgment] ensure that the

acquirer has a cost‐competitive health‐care provider network. To compete

effectively in the sale of commercial health insurance, insurers need a network of

health‐care providers at competitive rates because hospital and physician

expenses constitute the large majority of an insurer’s costs. By requiring New

West and the hospital defendants to help to provide the acquirer with a cost‐competitive provider network, Sections IV(G)–(I) help ensure that the acquirer

will be able to compete as effectively as New West before the parties entered the

Agreement.34

In the Blue Cross-Blue Shield of Montana case, because of the importance of ensuring

that the acquirer had a cost-competitive network, the Department required that the hospital

defendants, which owned New West, enter into three-year contracts with the buyer of the

33 See Press Release, Dep’t of Justice, Blue Cross Blue Shield of Michigan and Physicians Health Plan of Mid-

Michigan Abandon Merger Plans: Decision to Abandon Deal Follows Justice Department’s Decision to Challenge the

Acquisition (Mar. 8, 2010), http://www.justice.gov/opa/pr/blue-cross-blue-shield-michigan-and-physicians-health-

plan-mid-michigan-abandon-merger-plans. 34 Competitive Impact Statement at 17, Blue Cross-Blue Shield of Montana, No. 11-cv-123-RFC (D. Mont.

Nov. 8, 2011) (emphasis added).

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August 5, 2015

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divested assets that were “substantially similar to their existing contractual terms with New

West.” The Department declared these contractual guarantees to be “vital” to ensuring the

effectiveness of the remedy: “Because these three‐year contracts provide the acquirer with a cost

structure comparable to New West’s costs, they position the acquirer to be competitive selling

commercial health insurance in all four geographic markets.”35

F. Medical Loss Ratio

Finally, Anthem and Cigna may argue that the Department should lower the antitrust bar

because of the margin restrictions imposed by the ACA’s Medical Loss Ratio (MLR) provisions,

which require that fully insured health plans spend a minimum percentage of their premiums

(less taxes, licenses, and regulatory fees) on medical services and quality improvement

initiatives. In particular, the ACA requires that large group insurers spend at least 85 percent of

their net premium dollars on these items, while small group and individual insurers must devote

at least 80 percent of them.36

The Department should reject this argument, as it has in the past. First, MLR

requirements only apply to fully insured products. They do not cover at all the substantial

competition between the parties for self-insured products. Second, the MLR requirements are not

price-caps. Nothing in the requirements prevents an insurance company from increasing its costs,

in order to increase prices and margins. Third, the requirements do not prevent health insurance

companies from exercising market power by restricting provider networks or reducing service

levels so long as they meet the minimum MLR thresholds.

3. Conclusion

A competitive commercial health insurance market is essential for access, affordability

and innovation in the health care sector. Anthem’s proposed acquisition of Cigna presents a

substantial risk to such competition on an unprecedented national scope. The AHA is confident

that the Department will work to protect consumers by vigorously investigating the transaction.

35 Id. at 17–18. 36 See ACA, Pub. L. No. 111-148, § 10101(f), 124 Stat. 119, 886 (2010) (amending Public Health Service Act

§ 2718(b)(1)(A), 42 U.S.C. 300gg-18).